Greggs trading update & capital structure review

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 announced today a trading update and a capital structure review.  The update covered the 16 weeks to 25 April 2015 and sales grew by 5.0% and like-for-like sales in their own shops grew by 5.9% - ahead of their expectations.  This compared to total sales growth for 2014 of 3.9% (adjusting for the extra week in 2014) and like-for-like sales in their own shops of 4.5%.

 

During these 16 weeks they have been busy, completing 69 shop refurbishments and opening 24 new shops, including 17 franchised units in transport locations.  They also closed 18 shops, giving a total of 1,656 shops trading at 25 April; this comprised 1,594 of their own shops and 62 franchised units.  They expect to refit 200 to 220 shops in 2015. 

 

As part of their capital structure review management have stated that they intend to maintain their progressive dividend policy, with a target that the ordinary dividend is two times covered by earnings.

 

They also see a need to maintain a year end net cash position of around £40m.  They state that due to the leasehold nature of their shop portfolio, they do not believe that it is appropriate to take on structured debt in the way of loans, overdrafts or bonds.

 

Importantly they have stated that they will not carry out the proposed share buyback announced at the time of the Group's preliminary results.  This is an excellent decision, a pity more management teams, with high P/BV ratios, do not come to this conclusion .  As I stated here at the time of the preliminary announcement "...A buy-back is a poor use of funds, especially with the current share price at over 4x book value..."; I am pleased their review has come to the same conclusion.

 

Instead of the buy-back management are declaring a special dividend of 20p, at a cost of £20m.  An excellent outcome, with the expectation of this being the preferred route for returning capital in the future for material amounts of excess cash.

 

In the outlook for the remainder of the year management have stated that they "...expect to deliver good growth for the year as a whole and further progress against our strategic plan..."

As I stated here, I estimate that Greggs on a DCF basis have an intrinsic value of approximately 1375p and at today's price of 1119p (up 4%) would yield 3.9% and have a 22% margin of safety.