The Chancellor's Budget always attracts a fair amount of criticism. This year, though, hostility has come from a surprising quarter - the bakery industry.
- Cash generative and debt free
- Expanding away from the high street
- "Pasty tax" could hit profits
- Weak like-for-like sales
- Competition for customers increasing
- Struggling to recover higher costs
Vociferous bakers, led by the UK's largest bakery chain, Greggs, are up in arms about a proposal to slap VAT at the standard rate on such delights as pasties and sausage rolls, and are mounting a concerted effort to persuade George Osborne to scrap the so-called pasty tax. The unwelcome change is due to come into effect in October and would see standard-rate VAT applied to bakery snacks, which are currently exempt, putting, according to Greggs, 20p on the price of a sausage roll and 40p on a pasty.
For Greggs, that's significant. If the VAT increase is implemented - despite the company's best efforts to influence a recently-completed consultation - either it will have to pass on the extra tax to customers or absorb it itself. In the first instance, the result would be that customers buy fewer bakery snacks; Wayne Brown, an analyst at broker Cannacord, estimates that sales could be hit by 1 per cent and that could knock 7 per cent, or £0.5m, from pre-tax profits because most of Greggs' costs are fixed. On the other hand, if Greggs absorbs the tax cost itself, that will come straight off profits. So far at least, Greggs hasn't come up with a convincing argument as to why hot takeaway food should incur VAT while snacks produced hot and left to cool, such as pasties, should not.
GREGGS (GRG) | ||||
|---|---|---|---|---|
| ORD PRICE: | 453p | MARKET VALUE: | £458m | |
| TOUCH: | 453-454p | 12-MONTH HIGH: | 564p | LOW: 420p |
| DIVIDEND YIELD: | 4.7% | PE RATIO: | 11 | |
| NET ASSET VALUE: | 196p | NET CASH: | £19.5m | |
| Year to 31 Dec | Turnover (£m) | Pre-tax profit (£m) | Earnings per share (p) | Dividend per share (p) |
|---|---|---|---|---|
| 2008 | 628 | 49.5 | 33.6 | 14.9 |
| 2009 | 658 | 48.8 | 34.1 | 16.6 |
| 2010 | 662 | 52.5 | 37.8 | 18.2 |
| 2011 | 701 | 53.1 | 39.5 | 19.3 |
| 2012* | 742 | 54.0 | 43.0 | 21.1 |
| % change | +6 | +2 | +9 | +9 |
Normal market size: 1,500 Matched bargain trading Beta: 0.4 *Liberum Capital forecasts | ||||
The uncertainty over the government's decision has been the primary factor in Greggs' sliding share price, and it's still two months before the outcome will be known. In the meantime, investors will have plenty of time to digest the implications of last week's lacklustre trading update. Like-for-like sales in the first 19 weeks of this year were down 1.8 per cent but, as broker Numis points out, the underlying drop is closer to 3.5 per cent after excluding the effect of an additional day's trading in the period.
The poor performance can be partly blamed on the wet weather, which, according to the British Retail Consortium, was largely to blame for a 6.4 per cent fall in high-street footfall in April. But high-street trends are generally weak anyway and Greggs is predominately a high-street business, although it's expanding into locations such as workplaces and motorway services. It's apparent that the tough consumer environment has taken its toll on like-for-like sales growth for some time – in 2011, for example, underlying growth was just 0.2 per cent. Meanwhile, rising competition for value-orientated food-on-the-go customers has hampered Greggs' ability to pass on higher input costs, which means profit growth has been pedestrian, despite expansion and efficiency programmes.
