Shares in Greggs (GRG) fell nearly 9 per cent after the high street bakery chain warned full-year profits would be lower than expected because of weak sales in the first quarter. Chief executive Roger Whiteside said Greggs experienced lower customer footfall across much of the estate and that this underlying trend showed "little prospect" of improving in the short-term. "The issue is we have fewer customers out there," he said. "Successive years of being under pressure means eventually something has to give and shoppers have to adjust their budgets accordingly."
Total sales in the 17 weeks to 27 April rose 3 per cent, but like-for-like sales fell 4.4 per cent, mainly due to the snow in January and March. Underlying sales in the latest two weeks, which reflect 'normal' trading conditions, still fell 1.5 per cent, indicating that Greggs is attracting fewer customers through its doors, regardless of what the weather does. Gross margins also took a hit as more people bought promotional deals, and this trend is expected to continue throughout the year. As a result full-year profit is expected to be "below the lower end of market expectations", which ranged from £47.5m to £55.2m.
This is the first profit warning that Greggs has issued since the height of the economic recession in 2008 and comes just three months into Mr Whiteside's tenure. He says customers "won't be under less pressure any time soon", and as such, Greggs is reshaping its estate away from conventional high street outlets into areas where people travel, work or play. More than 75 per cent of new store openings this year will be in these locations. Mr Whiteside insists Greggs will continue to open stores this year and is on track to refurbish 250 existing ones by the year-end.
On a brighter note, the wholesale/franchising businesses with Iceland and Moto are doing well. Sales here rose 2.9 per cent. Management is looking to further develop the frozen bake-at-home range with Iceland and hinted that there could be long-term opportunities to develop the product through other retailers.
Broker Espirito Santo originally forecast pre-tax profit of £54.2m in 2013. Now, assuming pre-tax profit of £47m, it says this would give EPS of 35.7p, putting the shares on 13 times calendar 2013 earnings. Greggs is cash generative, but with pressure on profits and capital spending this year, the broker reckons the retailer will be in a small net debt position over the next two years. It points out that even with EPS of 35.7p, a flat dividend of 19.5p would still be 1.8 times covered.
