Shares in Greggs (GRG) have dropped 7.3% to 429p after the bakery retailer posted a severe profits warning. A further round of downgrades accompanied news that the food retailer's annual profits will fall short of even the most pessimistic City forecasts due to poor weather, fragile consumer confidence weather and heavy promotions.
This is not the first setback this year for Greggs. Its share price has been particularly volatile as the following chart illustrates, not helped by a flaky update last month - click here to read our story on that event.
In today's trading update, the value sandwiches-to-sausage rolls seller said trading has remained in negative territory since it unveiled downbeat figures for 2012 last month (20 Mar). Like-for-like sales, excluding newly-opened outlets, plummeted 4.4% in the first 17 weeks to 27 April. Highly weather-sensitive and exposed to the structurally-challenged UK High Street, Greggs' same store performance was hit by woeful weather in January and March, as well as a continuation of lower footfall 'across much of the estate'.
Amid fragile consumer confidence, recently-appointed chief executive officer Roger Whiteside said investment in successful promotional deals has had a 'slight impact on margin', leaving first quarter profits 'behind our plan and last year.' With negative operational gearing from weak like-for-like sales taking its toll, Whiteside warned profits for the year to 28 December 'are likely to be slightly below the lower end' of the £47.5 million to £55.2 million forecast range.
On the positive side, the cash-generative retailer's rate of like-for-like sales decline has reduced to 1.5% over the past two weeks, as Greggs laps the start of last year's wet spring. Total sales over the first 17 weeks grew 3% with the help of wholesale and franchise sales.
Greggs is successfully competing in the 'bake at home' market through the sale of frozen sausage rolls, pasties, pies and desserts through Iceland Stores and opening franchised shops in motorway service stations in partnership with Moto, although as Shore Capital points out in a note this morning, 'the extend to which this is cannibalistic is a debating matter.'
Revenue also benefited from new shop openings where Greggs is reduced its high-street focus by shifting towards locations such as retail and industrial parks and railway stations.
Following today's gloomy news, Liberum Capital's Patrick Coffey has slashed his 'bottom of the range' taxable profits forecast by 7.5% to £46.1 million, for a 5% reduction in estimated earnings to 35p. 'There is a high level of uncertainty surrounding the aggressive discounting from competitors, declining footfall on the UK high street as well as the decline in current trading already seen this year', says the analyst who has a 'sell' rating on the stock.
N+1 Singer has downgraded its profit estimate by 13% to £44.5 million and writes: 'Notwithstanding the self-help strategy, prudence dictates that we factor in very modest growth for FY14 until there is more tangible like-for-like sales growth and margin recovery in evidence.'
