Value sausage rolls, sandwiches and coffees seller Greggs’ (GRG) AGM update has left a sour taste with investors this morning.
The shares crashed 15% to £10.79 after warning that full year underlying profits are likely to be flat. This is being blamed on foul weather through March and April, and ‘the uncertainties over market footfall’.
ALMOST NO GROWTH AT ALL
Like-for-like sales growth slowed to 1.3% in the first 18 weeks of 2018. That's versus 3.5% growth for the comparable period last year. Dire weather has hit demand for Greggs’ food-on-the-go.
‘The combination of these factors,’ groans Roger Whiteside (pictured below) guided Greggs, ‘along with our strong comparative performance in the same period of 2017, has made for a challenging trading environment throughout March and April. Average transaction values continued to grow but we saw a reduction in like-for-like transaction numbers.’
WHAT THE ANALYSTS ARE SAYING
Paul Hickman, analyst at Edison Investment Research, argues ‘it is hardly a surprise that extreme weather conditions in March and April impacted trading, with some shops unable to open.
Of more concern is a weaker underlying trend in footfall, partially compensated by higher transactions. Like-for-like sales growth in the first 18 weeks was up 1.3%, down from 3.2% in the first eight weeks, with the adverse weather contributing nearly 1% of that decline.
Against that, Greggs is seeing stronger sales in innovative areas such as the £2 breakfast, hot food, and healthier options such as summer salads. Similarly Greggs is reaching out into new locations like Westminster Tube station, Birmingham New Street station, Glasgow Buchanan bus terminal and East Midlands airport, which should provide insulation from the High Street in the medium term.'
However, Hickman also explains that ‘like-for-like sales are back in growth in May, and the strategy is very much on track with store openings plans unchanged and manufacturing consolidation going to plan. Today’s guidance of 2018 profit at around the same level as 2017 implies around a 5% downgrade for the year, somewhat less than the share price reaction.’
Meanwhile Russ Mould, investment director at AJ Bell, comments: ‘Sausage rolls specialist Greggs has become the latest victim of bad weather and weak retail footfall. People visiting its stores are spending more money with growth in average transaction values, yet it has suffered from a reduction in like-for-like transaction numbers.
WEATHER NOT THE WORST PROBLEM
‘While you can argue that weather is a one-off issue, general footfall weakness suggests a more serious problem, at least in the short term.
‘Greggs is clearly doing well with hot drinks and hot savoury items, as it has done for a long time, but the jury is still out on whether introducing the likes of ‘feta and beetroot dip with grains and lemon salad’ is a step too far.
‘The idea of reinventing itself to a ‘food-to-go’ chain has been in motion for some time and the business has seen success with more mainstream items like lower calorie wraps and porridge.
‘However, there is a danger that Greggs’ transformation is happening at the wrong time with consumers increasingly cautious about how they spend money. That may explain why Greggs has now flagged that it will be extending its value meal deals offer.
‘The people running Greggs are smart cookies and they should know how to find a way to adapt to the challenging market conditions.'
