Company Announcements

28 July 2020

INTERIM RESULTS FOR THE 26 WEEKS ENDED 27 JUNE 2020

Greggs is a leading UK food-on-the-go retailer,

with more than 2,000 retail outlets throughout the country

Resilient business model, encouraging re-start, confident of long-term growth

Adapting to the Covid-19 crisis

·    Shops closed for most of the second quarter

·    Temporary financing arranged through Covid Corporate Financing Facility (CCFF)

·    Coronavirus Job Retention Scheme (CJRS) enabling continued employment of furloughed colleagues

·    Encouraging sales trend since shop reopening; latest week reaching 72% of 2019 level

·    Diversity of shop locations and broad customer appeal proving a strength

·    Adapting investment in strategic growth priorities; digital channels rollout being accelerated

·    New shop pipeline remains strong but temporarily slowed until outlook becomes clearer

·    Continuing investment in improving supply chain efficiency

Financial performance

·    Total sales in H1 2020 £300.6m (H1 2019: £546.3m)

·    H1 Company-managed shop like-for-like sales* down 49.0%

·    Pre-tax loss £65.2m (H1 2019: £36.7m profit)**

·    Net debt at period end of £26.2m, reflecting operating cash outflows and issue of £150m of CCFF commercial paper

·    Working to establish bank financing facilities in second half of year

·    No interim dividend declared

* like-for-like sales in Company-managed shops (excluding franchises) with a calendar year's trading history

** includes exceptional pre-tax charge of £0.7m in H1 2020 (H1 2019: £4.0m) in relation to ongoing supply chain investment programme

"Following successive years of unbroken growth Greggs made a great start to 2020, coming into the year with momentum and clear strategic plans. The strength of our business model enabled us to secure the liquidity needed to support our business through the current crisis and then to adapt our operation and strategic investment plans in response to the new environment.

"I want to thank the amazing team of people in our business who have risen to the challenges created by this crisis both in supporting the wider community and working together to redesign our operation to work safely under these new conditions.

"Greggs is now well prepared to deal with the challenges of social distancing and operate through the conditions we are faced with.  Greggs remains a much-loved brand with long-term growth opportunities and the business is better placed to adapt to new conditions than ever before."

-     Roger Whiteside, Chief Executive

An audio webcast of the analysts' presentation will be available to download later today at http://corporate.greggs.co.uk/results-centre

High resolution images are available for the media to view and download from https://corporate.greggs.co.uk/media-centre/image-and-video-library

CHIEF EXECUTIVE'S REPORT

Following successive years of unbroken growth Greggs made a great start to 2020, coming into the year with momentum and clear strategic plans. The strength of our business model enabled us to secure the liquidity needed to support our business through the current crisis and then to adapt our operation and strategic investment plans in response to the new environment.  We are demonstrating our resilience under crisis conditions and are now adjusting our plans to ensure that Greggs remains a strong business with great potential for further growth.

Securing the business through lockdown

In our preliminary results on 3 March we disclosed that in the first nine weeks of 2020 Company-managed shop like-for-like sales had grown by 7.5 per cent, and total sales were up 11.7 per cent.  We also came into the year with a very strong cash position following the Company's record financial performance in 2019.

At that time the Covid-19 crisis had just started to impact and our initial intention was to continue trading as a food provider, but it quickly became apparent that this would not be possible and was inconsistent with the "stay at home" phase of lockdown.  On 23 March we announced that, for the safety of our staff and customers, we would temporarily close our entire shop estate.  Most of our supply chain operations were also closed at this point, with the exception of our Balliol Park savoury manufacturing facility which has continued to supply Iceland Foods with our successful 'bake at home' offer.

Our immediate priority was to ensure that the Company had access to sufficient liquidity.  Greggs has always been prudently run, maintaining a strong balance sheet with no long-term debt other than lease liabilities, and a positive cash balance. 

The strength of our balance sheet coming into this period meant that we had sufficient time to arrange additional liquidity, and the Bank of England's Covid Corporate Financing Facility (CCFF) proved to be the quickest method of arranging temporary financing.  At the same time, we took actions to protect our cash position, including the cancellation of the planned final dividend for 2019, furloughing most of our team, cancelling annual pay increases, taking voluntary Director salary reductions and freezing all but essential expenditure.  The receipt of valuable Government support in the form of business rates relief and the Coronavirus Job Retention Scheme (CJRS) allowed us to maintain employment of our furloughed colleagues at full pay during the lockdown phase.

As we closed the shop estate our local teams made a great job of ensuring that as much surplus food as possible was donated to good causes in their communities.  The Greggs Foundation has reprioritised its activities to respond to immediate needs, increasing the resources available to provide a helping hand to those in hardship and offering additional funds to local community groups that support the most vulnerable in our communities.

Restarting under social distancing

In reopening our shops we followed a three-phase plan:

1.  Early May - trials in a small number of shops to test new social distancing measures and operational processes.

2.  18 June - a larger-scale opening of 800 shops to takeaway customers, with new procedures and equipment.

3.   2 July onwards - reopening of the rest of the shop estate to takeaway customers.           

Safety of operations has been paramount, and all team members have been trained in revised operational procedures to protect them and our customers.  Shops have put in place floor markings and signage to help customers maintain social distancing and protective screens have been installed at our counters.  Team members have been provided with protective workwear and are following a revised and extensive cleaning regime.  Customers have access to hand sanitiser and are encouraged to pay using contactless methods.

In anticipation of lower-than-normal sales levels under social distancing we have limited our initial product range to focus on our best sellers.  This helps us to deliver good availability without excessive waste, but has also meant that a number of our manufacturing and operational teams have remained on furlough.  The continued use of the CJRS will be crucial in supporting jobs whilst demand recovers.

Whilst we can be confident of our ability to operate under social distancing it is clear that sales will be constrained whilst these conditions prevail, with an observed impact on both our capacity to serve and on customer demand.  Our shops are typically small in size and operated by small teams that can be reorganised to operate with social distancing.  However, in the busiest 20 per cent of our shops where team sizes are above average our ability to deploy full shop teams is currently restricted.  This is especially the case in physically constrained shops, as often found in travel locations.  In these shops service is currently slower than normal, however this tends to coincide with locations where demand is most impacted by reduced travel and less office working.

Company-managed shops have seen sales develop since reopening, and reached 72 per cent of 2019 levels in the most recent week to 25 July 2020.  Whilst these are early days, Greggs is already showing that the variety and geographical reach of our shop estate, combined with the broad appeal of the brand, which is not materially dependent on office-based workers, means we are less impacted by social distancing than many.  The majority of our shops are located in towns and suburbs, or catchments that are generally accessed by car.  However, we still expect sales to remain below normal for as long as social distancing is required.

At this point I must give credit to the amazing team of people in our business who have risen to the enormous challenges created by this crisis both in supporting the wider community and working together to redesign our operation to work safely under these new conditions. Adversity has brought out the best in us and we can be proud of our achievements as together we rebuild the business from here.

Confidence in long-term growth

We are unable to predict how long social distancing will be required but we remain confident of our potential for growth once this constraint is removed.   Our strategy for growth is based on shop expansion, the roll out of new digital channels and day-part development.  All of these remain relevant in a post-Covid world but we have adapted our plans in light of social distancing.

Digital channels, in the form of 'click and collect' and delivery, which allow customers to order and pay in advance can help us serve additional customers in a safe and effective manner during social distancing.  We are therefore planning to roll both services out nationwide in the months ahead.  Those digital-only shops that formed part of our reopening programme are now being reviewed with a view to transitioning to combined walk-in and digital services that can still operate within our social distancing procedures.

Whilst customer footfall remains below normal we have adapted our plans to develop later evening trading to focus on those stores offering delivery and 'click and collect'.  We have also continued to make good progress with the development of our Greggs Rewards digital app, which will combine multichannel access and our loyalty programme in one place.

We retain a strong pipeline of new shop opportunities and continue to see the potential for Greggs to grow its estate, but have temporarily slowed our new shop opening programme whilst we assess the impact of social distancing on trading levels.  In addition, we have brought forward a number of planned closures of shops that have become unviable more quickly as a result of current conditions.  In the first half of 2020 we opened 20 new shops (including 7 franchised units) and closed 45 shops, giving a total estate of 2,025 shops (of which 307 are franchise units) as at 27 June 2020. Over the year as a whole we now expect to open c.60 shops and close c.50.

The significant programme of investment in our supply chain has proved particularly valuable in recent weeks, with our manufacturing sites better able to flex production to demand.  We intend to complete the transformation of our manufacturing operations this year, whilst slowing down the remaining activity designed to increase logistics capacity, reflecting the temporary slowdown of our shop opening plans.  In addition, we have continued with the investment in our new robotic frozen logistics facility in the North East, which will significantly improve logistics efficiency and reduce third-party costs when it comes into operation in the second quarter of 2021.

Financial performance

Our financial results for the first half of 2020 reflect the closure of our shops for three months of the reporting period.  Total sales for the 26 weeks to 27 June 2020 were £300.6 million, 44.9 per cent down on the same period of 2019.  The pre-tax loss in the first half of 2020 was £65.2 million (2019: £36.7 million profit) and there was a net cash outflow of £118.4 million before the introduction of additional financing.  Exceptional costs associated with our supply chain investment programme amounted to £0.7 million (H1 2019: £4.0 million) and are included in the overall result.

The diluted loss per share was 53.4 pence (2019: 28.5 pence earnings per share).

The closure of our shops and subsequent actions resulted in a number of one-off impacts that are reflected in these results.  Residual stocks of food and drink items that would have been unusable on reopening were donated to good causes wherever possible.  The total charge for write-offs and provisions for unusable stock was £9.0 million.  The acceleration of shop closures crystallised impairment charges amounting to £6.1 million and a further £1.3 million charge has been made for the impairment of 14 shops which continue to trade but are unlikely to recover the full carrying value of their assets.  Linked to the impairment charges we have provided for £2.7 million in onerous costs directly linked to these leases, for example rates, service charges and insurance.

In line with our previous expectations, the weekly cash outflow during the closure period, after support and mitigating actions, was £4.4 million per week.  In addition to this the settlement of liabilities existing at the point of closure led to an outflow of around £75 million through the second quarter.  In total the net cash outflow in the second quarter was £102.5 million, excluding financing.

In order to secure the Company's liquidity at this time we put in place a commercial paper platform under the CCFF.  The credit available to Greggs under the scheme is significant and in early April we partially accessed this by issuing £150 million of commercial paper, with a duration of 11 months.  Under current rules the facility is available for issue of further commercial paper until March 2021, at a maximum duration of 12 months.  Our intention is to repay this debt as soon as is possible, replacing it with commercial arrangements to the extent necessary.  To this end we are in discussions with banking partners to establish a financing facility that will provide Greggs with additional liquidity for the medium term.  We expect this to be put in place in the current financial year.

Including the £150 million CCFF receipt Greggs' net debt position (including short-term deposits held in current assets of £70 million) at 27 June 2020 was £26.2 million.  With our shop estate open again, the speed at which we can restore the Company to a net cash position will largely be determined by the pace of recovery in sales levels.  A number of other factors are relevant to financial performance during this recovery period:

-     The Company continues to draw on support for employment from the CJRS.  In respect of the first half of 2020 this support totalled £69 million, of which £57 million was received in the period.  The scheme is available, on modified terms, until the end of October 2020.  Our current plans indicate that we are likely to draw a further £20-£25 million in employment support across the period from July to October.

-    The very welcome business rates holiday for retail, hospitality and leisure businesses runs from April 2020 to March 2021.  Greggs expects to benefit from business rates relief amounting to £25 million over this period.

-     We are in active discussions with the landlords of our shops and are succeeding in negotiating rent reductions.  We paid our March quarterly rent payment in full and landlords were informed then that we intended to pay rents monthly in advance from June onwards.  We have now paid the monthly rents for July and August on this basis.

-     In the first half of 2020 we incurred incremental costs of £2.5 million to put in place protective workwear, screens and additional signage in order to enable our shops to operate under social distancing rules.  Looking forward we expect to incur additional costs of c.£5 million in the second half of the year for the provision of protective workwear, additional cleaning and hand sanitiser.

-     Cost inflation has eased somewhat compared with our expectations earlier in the year.  Whilst labour cost inflation is in line with previous guidance we now expect food, packaging and energy inflation across 2020 to be around four per cent.

-     Our capital expenditure plans for 2020 have been significantly reduced, primarily in response to the changes to our shop opening plans for the year.  Capital expenditure during the first half was £33.6 million (2019: £33.2 million) as we curtailed investments in our shop estate but continued with key supply chain projects, primarily the new robotic frozen logistics facility at our Balliol Park site.  In the second half of the year we plan to complete only a small number of new shops, whilst progressing a small number of strategically-important supply chain and IT-related projects.  We now expect total capital expenditure in 2020 to be around £55.0 million (2019: £86.0 million).

-    Interest costs relating to our financing arrangements under the CCFF scheme were £0.2 million in the first half of the year and are expected to total £0.7 million for the year as a whole.  Further costs may arise as additional facilities are established.

The Board has considered the financial position of the business, its plans and a number of pessimistic scenarios as outlined in the notes to these condensed accounts.  These are designed to test the ability of the business to withstand continued subdued trading conditions and the possibility of a further lockdown period as a result of the Covid-19 crisis.  In these downside scenarios the Company would need to continue to access the liquidity available under its CCFF, or alternative facilities.  The Board is in discussions with commercial banks to establish additional facilities in the near term.  Taking all this into account the Board has concluded that it remains appropriate to prepare the interim financial statements on a going concern basis.

In protecting the Company's financial position at the start of the Coronavirus crisis the Board made the decision not to distribute the final dividend in respect of 2019, preserving £33 million of cash.  In the immediate future the Company's priority will be to repay the Government funding it has received under the CCFF scheme and restore balance sheet strength, with access to additional liquidity in reserve.  The Board is not declaring an interim dividend for 2020.  Its intention is to re-establish dividend distributions as soon as is prudently possible, balancing this against the opportunities that remain open to Greggs to invest for further growth.

Current trading and outlook

We have been encouraged by our ability to operate successfully under social distancing guidelines.  In the most recent week, we have seen average sales across the estate of around 72 per cent of the comparator period, with some variation by location type, as expected.  The relative resilience we have demonstrated reflects both our broad appeal and our widely-distributed shop estate.

Recent sales levels have allowed us to bring approximately 75 per cent of our colleagues out of furlough and we are trading broadly at operating cash breakeven.  As sales levels pick up, we will be able to bring more of our colleagues back from furlough; in the interim, we continue to be reliant on the CJRS to protect those roles.  Looking forward we expect that the business should break even in profit terms when it achieves sales around 80 per cent of the 2019 level.

It remains very difficult to predict the outlook and likely performance of our business, and we recognise the possibility of further lockdowns either nationally or regionally.  However, Greggs is now well prepared to deal with the challenges of social distancing and operate through the conditions we are faced with.  Greggs remains a much-loved brand with long-term growth opportunities and the business is better placed to adapt to new conditions than ever before.

We intend to next update on our third quarter trading on 29 September 2020

                                                                                                                         Roger Whiteside

Chief Executive

                                                                                                                                28 July 2020