Greggs plc (LON: GRG) have today provided interim results for the 26 weeks to the 29 June 2019.
First half financial highlights
• Total sales up 14.7% to £546m
• Company-managed shop like-for-like sales* up 10.5%
• Underlying pre-tax profit margin of 7.5% (H1 2018: 5.4%) driven by strong sales growth and operational cost control
• Underlying pre-tax profit excluding property gains** and exceptional charge*** £40.6m (H1 2018: £25.7m)
• Reported pre-tax profit including property gains and exceptional charge £36.7m (H1 2018: £24.1m)
• Strong cash generation supporting investment programme and enhanced returns to shareholders
• Ordinary interim dividend per share up 11.2% to 11.9p in line with our policy of paying one third of the previous year’s total dividend as an interim dividend
• Special dividend of 35.0p per share declared
*like-for-like sales in company-managed shops (excluding franchises) with a calendar year’s trading history
** freehold property disposal profits of £0.1m in H1 2019 (H1 2018: £0.3m)
*** exceptional pre-tax charge of £4.0m in H1 2019 (H1 2018: £1.9m) in relation to previously-announced restructuring
Operational highlights
• Exceptionally strong trading built on the successful end to 2018, and helped by the popularity of the new vegan-friendly sausage roll
• Strong growth in customer visits as Greggs broadens its appeal for food-on-the-go
• Traditional bakery favourites selling well alongside growth in Fairtrade coffee, breakfast and new hot food options
• Shop opening programme progressing well:
- -54 new shops opened, 23 closures; continue to expect around 100 net new shops for the year as a whole
- -1,984 shops trading as at 29 June 2019
• Supply chain investment programme progressing well
• Extended trials in new channels including ‘click & collect’ and delivery
“Greggs has delivered an exceptional first half performance, building on the strong finish to 2018. We have continued to make strategic progress with our programmes of investment in infrastructure to support future growth and in developing the products and channels to market that will help achieve our ambition to be the customers’ favourite for food-on-the-go.
“Given the strength of our year to date and the outlook, we have decided to increase investment in strategic initiatives in the second half of the year to help to deliver an even stronger customer proposition and further growth in the years ahead. Our expectations for underlying profits for the year as a whole remain unchanged.”
Roger Whiteside, Greggs plc Chief Executive
CHIEF EXECUTIVE’S REPORT
Greggs has delivered an exceptional first-half performance, building on the strong finish to 2018. Total sales for the 26 weeks to 29 June 2019 grew by 14.7 per cent to £546 million, with like-for-like sales in company-managed shops up by 10.5 per cent compared with the first half of 2018, when trading conditions were more challenging. We have continued to make strategic progress with our programmes of investment in infrastructure to support future growth and in developing the products and channels to market that will help achieve our ambition to be the customers’ favourite for food-on-the-go.
Operational review
The very strong performance in the first half of 2019 was broadly-based. We saw excellent sales growth and at the same time delivered higher service standards and good operational cost control. Market conditions were also supportive, with high employment levels, growth in consumers’ disposable incomes and more settled weather than was the case in the first half of 2018.
We came into 2019 with good sales momentum, which had built progressively through the second half of 2018. The launch of the now famous vegan-friendly sausage roll took this to another level, with initial demand significantly outstripping our expectations. The product has remained extremely popular with customers and is now one of our top sellers, demonstrating the demand for greater dietary choice in food-on-the-go.
Our award-winning marketing initiatives surrounding product launches and customer engagement are helping to drive increased customer visits, broadening our appeal for food-on-the-go at all times of the day.
Growth in customer visits has in turn driven strong sales across our traditional savoury products and sales of our traditional sweet products continue to benefit from the improved quality delivered by our investment in manufacturing centres of excellence.
Breakfast-on-the-go remains the fastest-growing element of our trading day, with sales of our freshly-ground Fairtrade coffee now placing us third in the UK out-of-home coffee market. Our breakfast food offer is growing with fresh porridge and hot breakfast boxes becoming available in more shops as we roll out hot food cabinets.
With increasing demand for convenient meal solutions, we are continuing to develop our offer for later in the day. Our focaccia-style pizzas are growing in popularity, supported by our post-4pm pizza deal of a pizza slice and a drink for just £2. Hot food options are also being developed with the roll-out of hot food cabinets supporting growing sales of new lines alongside our existing hot sandwich range. Trials of extended late opening hours will follow in the autumn.
The current growth in customer numbers is a great opportunity for us to demonstrate to new and returning customers how significantly we have transformed the Greggs shop estate, creating an attractive food-on-the-go experience with relevant products, extended trading hours and more seating. In the first half of 2019 we opened 54 new shops (including 16 franchised units) and closed 23 shops, giving a total of 1,984 shops (of which 275 are franchise units) trading at 29 June 2019.
The emphasis on opening shops close to where customers are working or travelling is contributing to the ongoing rebalancing of the Greggs estate. 38 per cent of our shops now serve catchments wholly outside of traditional shopping locations and we anticipate that this proportion will continue to grow to more than 50 per cent in the longer term. We have just opened our fourth drive-through location in Newcastle upon Tyne and continue to work with partners to bring Greggs to other travel catchments such as railway stations, road and motorway services, and airports.
Our pipeline of new shop opportunities remains strong and we expect around 100 net openings in the year as a whole, of which around 40 are anticipated to be with franchise partners.
Strategic development
We are continuing to develop channels to market that will make Greggs even more accessible to customers. Our ‘click & collect’ pilot has now been extended to seven cities and we have extended our trial of delivery options to include Just Eat alongside our existing partnership with Deliveroo. These trials are providing valuable learning around the operational approach that must be adopted to ensure that customers receive a great service, however they shop with Greggs.
As previously communicated, in the second half of 2019 we plan to increase investment in strategic initiatives that will deliver further long-term benefits. Our current trading performance has demonstrated the Greggs brand’s capacity for additional growth and the strong cash flows resulting from our current initiatives have given us the resources to invest in this potential. These investments, which will benefit growth in the years ahead, include further improvements to service levels in our shops and digital platforms, better availability of hot food options and further enhancements to our already-strong reputation as a responsible business.
Our supply chain investment programme continues to provide capacity for further growth whilst improving product quality and making the business more efficient. In the first half of 2019 we completed the commissioning of new manufacturing platforms for bread rolls in our Manchester and Enfield sites, doughnuts in Newcastle and cream cakes in Leeds. We also made substantial progress in the construction of our new distribution centre based at Amesbury in Wiltshire, which is due to be commissioned at the end of the year.
In the balance of 2019, we will extend the distribution capabilities of our site at Treforest in South Wales and commence works to increase both the production and frozen storage capabilities of our savoury pastry manufacturing site at Balliol Park in Newcastle upon Tyne. This latter investment is the first stage of a two-year project to provide automated warehousing for our current and future needs.
Our investment in new centralised systems moved closer to completion in the first half of 2019, with the successful deployment of SAP manufacturing to our Balliol Park production site, and good progress in the transition to a new integrated human resources and payroll platform.
Financial performance
Underlying pre-tax profit excluding property gains and exceptional charges was £40.6 million in the first half of 2019 (2018: £25.7 million), giving an underlying net margin of 7.4 per cent (2018: 5.4 per cent). The exceptionally strong like-for-like sales growth, against a weak comparative period in 2018, contributed strongly to net margin, particularly when combined with good control of operational costs. New shop growth also continues to deliver good returns in both our company-managed and franchised estates.
Non-exceptional freehold property disposals realised profits of £0.1 million in the period (2018: £0.3 million) and we incurred a net exceptional charge of £4.0 million (2018: £1.9 million) as a consequence of our investment programme to reshape our manufacturing and distribution operations for future growth. Exceptional costs for the full year are expected to be £6.0-7.0 million. Pre-tax profit including all property profits and exceptional charges was £36.7 million (2018: £24.1 million). Diluted earnings per share (including exceptional items) were 28.5 pence (2018: 18.6 pence); excluding the exceptional items adjusted diluted earnings per share were 31.7 pence (2018: 20.1 pence).
These are the first results that the Company has published since the adoption of IFRS 16 (lease accounting). The balance sheet at 29 June 2019 recognises new ‘right-of-use assets’ of £276 million and new lease liabilities totalling £277 million. In the income statement rent costs have been replaced by a straight-line depreciation charge on each right-of-use asset and an interest charge that reduces over the lease term. As disclosed at the time of our preliminary results in March, we expect that the adoption of IFRS 16 will increase reported operating profit but reduce full-year profit before tax by £4.2 million in 2019, when compared with the previous method of accounting for leased assets. These interim results reflect approximately half of that expected profit impact. As a result of adoption of the ‘modified approach’ to transition the 2018 comparative results have not been restated.
Capital expenditure and financial position
Capital expenditure during the first half was £33.2 million (2018: £33.2 million) as we continued to invest in the transformation of our manufacturing and logistics capacity whilst also growing our company-managed estate. In light of our strong trading performance we have brought forward existing plans to reinvest in our Balliol Park manufacturing and logistics site. As a result of this, along with some further contingency planning ahead of the UK’s possible exit from the European Union, we now expect total capital expenditure in 2019 to be in the range £90-100 million (2018: £73.0 million). This is purely a change in the phasing of investments and our medium-term outlook for capital expenditure remains unchanged.
The Company continues to generate strong cash flows and remains in a robust financial position. We ended the period with a cash balance of £85.9 million (30 June 2018: £43.5 million).
Dividends
In setting the interim ordinary dividend the Board applies a formula so that the interim payment is the equivalent of approximately one third of the total ordinary dividend for the previous year. On this basis the Board has declared an interim dividend of 11.9 pence per share (2018: 10.7 pence). The overall ordinary dividend for the year will be declared in line with our progressive dividend policy, which targets a full year ordinary dividend that is two times covered by underlying earnings.
Having taken into account the Company’s investment requirements and the intention to maintain our progressive dividend policy, along with the current political and economic uncertainties facing the UK, the Board has concluded that around £35 million of the Company’s cash position is surplus to requirements. In accordance with our policy on cash distribution the Board has therefore declared a special dividend of 35.0 pence per share.
The interim and special dividends will be paid on 3 October 2019 to those shareholders on the register at the close of business on 6 September 2019.
Outlook
Current trading remains strong, although we continue to expect that the rate of like-for-like growth will begin to normalise as we face stronger comparative numbers in the second half of the year. Commodity cost pressure has been modest in the first half of 2019 but we expect higher food input costs in the balance of the year, resulting in overall cost inflation being at the higher end of our expectations.
The negotiation of the UK’s exit terms from the European Union continues to present significant uncertainties in the months ahead, with the potential impact that a disorderly exit might have on supply chains, tariffs, exchange rates and consumer demand. As disclosed at the time of our preliminary results in March, we are building stocks of key ingredients and equipment that could be affected by disruption to the flow of goods into the UK.
Given the strength of our year to date and the outlook, we have decided to increase investment in strategic initiatives in the second half of the year to help to deliver an even stronger customer proposition and further growth in the years ahead. These additional investments will offset the higher returns from our ongoing strong momentum, and therefore we maintain our previous expectations for underlying profits for the year as a whole. At the same time the strength of our financial position is allowing us to deliver enhanced returns for shareholders.
