Greggs interims

The leading bakery food-on-the-go retailer in the UK, with almost 1,700 retail shops throughout the country.  I have a holding in my income portfolio (epic code: GRG).

Greggs released their interim results today declaring that sales of £372.8m grew by 3.1% and LFL sales in their own shops grew by 3.2%.

Operating profit excluding exceptional costs and property disposals was up 36.3% at £15.4m, at this level operating margins were 4.1% an increase of 101bps.

EPS excluding exceptional and property disposals was 10.47p a 25.4% increase; reported EPS including the profit on property disposals of £1.4m and exceptional costs of £8.2m was 6.1p compared to 8.5p last year.

The interim dividend was maintained at 6p, which is disappointing that it remains frozen, given the improvement in performance and the company's financial capacity. 

Free cash flow was £9.7m compared to £4.0m last year.  Although following payment of the final dividend of £13.7m net cash was £21.8m, down from £24.6m at the year-end.  It's worth noting that for the full year last year FCF covered the dividend 1.1x.

During the period they opened 26 new shops, this included 14 franchise units and closed 36 shops, this resulted in a total of 1,661 shops, of which 39 are franchise units.  Management mention that almost all of their new shops were opened in locations away from high streets.

Commenting on the outlook for the year they stated that "...Sales growth in July has continued to be strong as we have not experienced the widespread heatwave conditions that depressed sales last year, but this is expected to fall back in the months ahead as we compare with better trading in the remainder of the year..." and "...Input cost inflation has been lower than we expected, driven by ingredients and energy and we expect this to continue through the rest of the year..." so they "... expect to deliver an improved financial result for the year..."

Greggs look to be on track with their changes of developing a simpler and more efficient operations in their supply chain and support areas.  Management state, that they have completed the restructure of their support areas and, are making good progress with plans to consolidate their in-store bakeries into their regional bakery network.  They anticipate that the majority of these in-store bakery transfers will be completed by the end of this year. 

The combined financial benefits from these changes remain on track to deliver savings of £2.5m in 2014 and £6.0m per year from 2015 onwards.

Greggs are also investing in process and systems platforms that will enable them to compete more effectively in the fast-moving food-on-the-go market.  They expect to deliver the first two elements of this programme, relating to workforce management and supplier relationship management, in 2014.  The next phase of this programme will include installing a SAP ERP system, the risks involved in implementing this type of solution should not be under-estimated, as it will touch every part of the organisation.

Although much has been achieved so far and the risks associated with implementing the changes needed in Greggs are reducing as they are successfully progressed, they are still only part of the way through the process, but the strategy looks to be delivering value.