Greggs has traded strongly for the first 19 weeks, and self-help measures such as refurbishments, openings, manufacturing rationalisation and product development continue to offer potential. Whether switching customers would be a net benefit in a consumer squeeze is uncertain, but the proposition is considerably stronger than when real wages were last negative. We retain our forecasts and valuation.
Trading progress for the first 19 weeks was promising with buoyant like-for-like sales growth of 3.6%. The good performance was attributable to favourable conditions, a late Easter, the c 50% adoption of the central stock forecasting and replenishment system, and the continuing success of the value product offer.
There was substantial estate development, with 87 refurbishments and net openings of 28 stores, which management regards as on track for the planned 100 for the year. The consultation process for the proposed rationalisation of manufacturing sites has concluded, while investment in the supply chain is continuing on plan.
Management estimates food cost inflation at 6-7%, while the new stock forecasting and replenishment system is temporarily increasing training and wastage costs. These factors are likely to add c £1m to first-half costs, which could take interim PBT lower than in 2016. However, in the second half there is forward cover over c 50% of food and energy costs, and initial costs of the stock system should fall away, while savings are extended. Savings on the manufacturing rationalisation should also start to flow within the year. As a result, we hold our forecasts.
Negative real wages for the March quarter confirms our lacklustre view of the retail environment in 2017. If the trend continues, we do not assume that Greggs will derive a net benefit from customers trading down from higher-priced offers. However, further progress on refurbishments and product development has strengthened the prospects.
As our valuation is based on a DCF projection, extending our forecasts, which are unchanged, we make no change to our existing valuation of 1,226p per share.