Company Announcements

3 August 2021

INTERIM RESULTS FOR THE 26 WEEKS ENDED 3 JULY 2021

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

with more than 2,100 retail outlets throughout the country

A strong first half recovery

First half financial highlights

·    Two-year LFL* for first half down 9.2%

·    Two-year LFL* positive since non-essential retail reopened

·    Strong cash position and good liquidity, with net cash at period end of £118.3m

* Like-for-like (LFL) company-managed shop sales performance against comparable period in 2019

** 2020 H1 and 2019 H1 underlying profit before exceptional charges (2020: £0.7m; 2019: £4.0m) and taxation

Operational and strategic development

·    Shop opening pipeline: 48 new shops opened in first half, 11 closures; 2,115 shops as at 3 July 2021. Anticipate circa 100 net new shop openings in 2021; expected to create 500 new retail roles in second half

·    New channels: delivery service now available from 837 shops; delivery sales represented 8.5% of company-managed shop sales in the first half of 2021

·   New Greggs Rewards app launched offering customer rewards across the full range of purchases

·    New product development: continued to drive menu development, including an expanded range of vegan-friendly products and options for other diets and dayparts

·  Investment in supply chain: new automated frozen distribution facility commenced operation

·    Greggs Pledge commitments well-received by colleagues, customers and investors

"Greggs once again showed its resilience in a challenging first half, emerging from the lockdown months in a strong position and rebuilding sales as social restrictions were progressively relaxed.

"We continue to make good progress with our strategic priorities, growing the shop estate and investing in our digital capabilities to compete in all channels and dayparts of our market.

"Whilst there continue to be general uncertainties in the market, given our recent performance we now expect full year profit to be slightly ahead of our previous expectation."

-     Roger Whiteside OBE, Chief Executive

CHIEF EXECUTIVE'S REPORT

Greggs once again showed its resilience in a challenging first half, emerging from the lockdown months in a strong position to rebuild sales as social restrictions were progressively relaxed. Total sales for the 26 weeks to 3 July 2021 were £546 million and like-for-like sales in company-managed shops, measured on a two-year basis, were 9.2 per cent lower than the equivalent period of 2019. 

Sales in the second quarter exceeded our expectations, delivering like-for-like sales growth versus the second quarter of 2019.  We continue to make good progress with our strategic priorities, growing the shop estate and investing in our digital capabilities to compete in all channels and dayparts of the food-on-the-go market.

Operational review

Sales developed progressively through the first half in response to our recovery initiatives and the easing of social restrictions.  To provide a consistent reference point we are currently reporting like-for-like sales on a two-year basis, against the level achieved in 2019.  On this basis sales in the first quarter were 21.5 per cent lower than the 2019 level.  In the second quarter the lifting of restrictions, particularly the re-opening of non-essential retail, made a significant difference to footfall and resulted in 2.8 per cent growth on a two-year like-for-like basis.  Walk-in customer transactions were still below the level seen in 2019 but were compensated for by higher average transaction values and increases in delivery sales.

We continue to experience differential performance by location type across our broad and diversified estate.  Shops in public transport hubs and large city centres continue to lag the overall Group recovery rate whilst customers staying closer to home are supporting our heartland shops in suburban and high street areas.  The strongest locations continue to be shops typically accessed by car, including many operated by our franchise partners.

The strongest-performing parts of the estate are also the locations where we see significant potential for further expansion, making Greggs accessible to more customers on-the-go.  In the first half of 2021 we opened 48 new shops (including 17 franchised units) and closed 11 shops, giving a total of 2,115 shops (of which 343 are franchised) trading at 3 July 2021.

Strategic development

We have refreshed our five-year plan and, in doing so, have reinforced our confidence in Greggs' ability to deliver sustainable, profitable growth into the long term.  The key areas of strategic development in the first half are outlined below; we expect to be in a position to provide a more detailed update on our plans later in the year.

Estate growth

Greggs has the opportunity to expand its UK estate to at least 3,000 shops, presenting a multi-year growth path.  Our strong, proven covenant is attractive to landlords and opportunities are now greater in number than they were before the pandemic.  As well as growing the overall size of the estate we will continue to relocate existing shops to enable them to better deal with the increased demands of multi-channel growth.  Our latest shop design, to be used for all new shops and relocations, will support collection of digital orders and incorporate kitchen modifications to allow better product customisation and menu development.

Seventy per cent of our shop openings in the first half were in car-accessed locations such as roadsides, petrol stations, retail parks and supermarkets. We have also been able to gain access on improved terms to sites in central London and transport interchanges, which we see being good strategic sites in the medium term.  Our pipeline of new shop opportunities remains strong and we expect around 100 net openings in the year as a whole, of which around half are anticipated to be with franchise partners, creating approximately 500 new retail roles in the second half of 2021.

New channels and dayparts

Alongside estate expansion to serve our walk-in customers, Greggs has invested to meet customer needs for food via new channels and at additional times of the day.  The most developed of these is our delivery partnership with Just Eat, which continues to grow and is now available across the UK from 837 of our shops.  In the first half of 2021 delivery sales represented 8.5% of company-managed shop sales.

Customers are becoming more used to pre-ordering food, either for delivery or to guarantee availability when they 'click and collect'.  Pre-ordering presents us with the opportunity to improve availability of our standard menu as well as offering personalised choices where customers can, for example, adapt the ingredients in their sandwich or the topping on their pizza.  Pre-ordering is a market trend that we believe will support, in particular, our ambition to grow sales in the evening daypart, a segment of the market where we are currently underrepresented.  Delivery will also have a role to play here, giving customers convenient access to Greggs' products wherever they are throughout the day.

Greggs Rewards

In today's consumer environment, it is key to have strong digital capabilities; we have invested significantly in recent years in this area to strengthen our customer proposition.  Our new Greggs Rewards app and new customer website have recently been launched to make the customer journey as convenient as possible. Our new app offers customers rewards across the full range of their purchases and is integrated with our click and collect service, described above.  Improved features such as an upgraded shop finder and access to nutritional information all work to make the customer journey with us easier.

Greggs Rewards will allow us to strengthen our relationship with our customers, better understanding their needs and providing us with improved communication tools to encourage increased visit frequency and wider menu participation.

Menu development

Our focus during the Covid pandemic has been to maintain full service on our best-selling lines.  We have seen strong growth in traditional areas such as our bakery range, which has been supported by our recent investments in centralised production platforms.

Following a temporary suspension in 2020, our new product development pipeline has been restarted.  Recent launches have included new options in our vegan-friendly range such as a 'Vegan Ham & Cheeze Baguette' and a vegan-friendly breakfast sausage.  Our latest line, the 'Vegan Sausage, Bean & Cheeze Melt' is due in our shops from 5 August.

We continue to develop our menu, adapting to offer greater choice in growth categories such as coffee and hot food, and reflecting consumer demand for dietary variety. Further progress has been made in developing the health credentials of our food and drink, reducing fat, salt and sugar wherever possible and offering more choices in low-calorie and vegan-friendly ranges.  We are increasing our in-store capabilities with the roll-out of more sophisticated coffee machines that can offer decaffeinated and dairy-free options. We are developing new offers in the delivery channel including sharing-box combinations and additional pizza toppings.

Supply chain

The growth opportunity ahead of us will require further development of our supply chain to meet demand for our in-house specialities and to create the logistical capacity to reach many more shops.  Our centralised manufacturing platforms have proved to be an efficient, high-quality basis from which to supply the bakery favourites that we are famous for and will be the template for capacity expansion in the years ahead.  In the short term we have plans to increase pizza capacity with a new manufacturing line at our Enfield manufacturing site and have already begun operating from our new automated frozen distribution facility at Balliol Park in Newcastle upon Tyne.

Support systems

Systems capability is key to meeting our growth ambitions.  The successful deployment of our SAP platform will complete in the second half and we have moved forward rapidly with new Microsoft Office capabilities, cloud database and reporting systems and leading customer relationship management solutions.  Our support teams have successfully adapted to remote working and we are increasingly seeing opportunity to bring technology solutions to our shop environment, making tasks easier and enabling more choice for customers. We have begun deployment of our new shop sandwich production and labelling systems to meet new legislative requirements due by 1 October, and these are also key for our made-to-order ambitions.

Greggs Pledge

Carrying out our plans in a responsible manner has always been an essential element of our approach.  In February 2021 we launched the Greggs Pledge, our commitment to further improve our ESG credentials in ten key areas.  This has been well-received by colleagues, customers and investors alike and will challenge us to be an even better business for the long term.

Board changes

As previously announced, Peter McPhillips retired as an independent non-executive director on 31 July 2021.  Peter has provided great support and commitment to the Board and management team during a period of significant change for the business and its supply chain operations.  On 21 June 2021 the Board announced the appointment of Mohamed Elsarky as an independent non-executive director.  Mohamed is an experienced international food manufacturing executive, who has held senior positions in Kellogg, Danone, and Godiva Chocolatier. He is currently Executive Chairman of Artisan du Chocolat, and has previously held non-executive director positions including at Nomad Foods, a company listed on the New York Stock Exchange.

We thank Peter for his support and guidance over the past seven years and look forward to working with Mohamed as we develop the business further.  Sandra Turner, senior independent director, will take over from Peter as non-executive director responsible for overseeing colleague engagement.

Financial performance

Pre-tax profit was £55.5 million in the first half of 2021 (H1 2020: £64.5 million loss, H1 2019: £40.7m profit, both before exceptional costs).  Structural cost reduction resulting from our actions in 2020 to reduce overheads and logistics costs, and the temporary benefit of relief from business rates, helped to mitigate the impact of restricted trading in the first quarter.  The better performance in the second quarter was further supported by stronger sales, relatively low levels of food input inflation and strong margins as a result of good cost control.

The improved performance and trading outlook of our shops resulted in us deciding to repay all CJRS support received in the first half and to reverse £2.0 million of previously-provided asset impairment charges.  Looking forward, commodity cost pressure is increasing; nonetheless overall we still expect relatively modest food input inflation in 2021 as a result of our forward purchasing cover.

The net financing expense of £3.9 million in the period (2020: £3.0 million, 2019: £3.2 million) comprised £3.1 million in respect of the IFRS 16 interest charge on lease liabilities, £0.6 million of facility charges under the Company's (undrawn) financing facilities and £0.2m relating to the Company's defined benefit pension scheme and foreign exchange losses.

Diluted earnings per share for the period were 43.2 pence (2020: 53.4 pence loss, 2019: 28.5 pence earnings).

Capital expenditure and financial position

Capital expenditure during the first half was £23.5 million (2020: £33.6 million; 2019: £33.2 million) as we completed work on our automated frozen distribution facility, commenced the roll out of new coffee machines and added 31 new shops to the company-managed estate.  We now expect total capital expenditure in 2021 to be circa £65 million (2020: £58.7 million; 2019: £86.0m).

The recovery in trading performance in the first half, and the related working capital inflow, generated strong cash flow and we ended the period with a cash balance of £118.3 million (27 June 2020: £26.2 million net debt).  In addition, the Company has access to a revolving credit facility that allows it to draw up to £100 million in committed funds, subject to it retaining a minimum liquidity of £30 million (i.e. maximum net borrowings are £70 million).

Dividends

Greggs last paid a dividend in October 2019, after which the planned final dividend for 2019 was cancelled in order to preserve cash in the early months of the pandemic.  Whilst there are still significant uncertainties in the months ahead, we now have a strong cash position and additional financing facilities to draw on if required.

With all this in mind the Board has declared an interim ordinary dividend of 15.0 pence per share.  It is the Board's current intention to target a full-year ordinary dividend that is around two times covered by underlying earnings.

The Board acknowledges that the business will be carrying a higher-than-normal cash balance in the short term but believes this is a prudent position to adopt given the backdrop, and intends to return any surplus cash to shareholders in due course, in line with its longstanding policy.

The interim dividend will be paid on 8 October 2021 to those shareholders on the register at the close of business on 10 September 2021.

Outlook

As we reported in our most recent trading update the level of sustained sales recovery in recent months was stronger than we had anticipated.  In the most recent four weeks to 31 July, like-for-like sales in company-managed shops, measured on a two-year basis, were 0.4 per cent above the equivalent period of 2019.

Despite the general uncertainties in the market, Greggs has traded well in recent months and demonstrated the resilience of its business model as well as its potential for longer-term growth as a multi-channel food-on-the-go brand.  As a result, we now expect full year profit to be slightly ahead of our previous expectation.

                                                                                                                         Roger Whiteside

Chief Executive

                                                                                                                            3 August 2021