Mike Ashley, the billionaire founder of Sports Direct with an undeniably strong nose for retailing, reckons that some parts of Britain’s ailing high streets are already dead. Try telling that to Roger Whiteside, chief executive of Greggs, who last week upgraded the bakery chain’s annual profit forecasts because recent trading had been so strong.
Mr Whiteside has been reducing Greggs’ presence in town centres, opening more of its new stores in office parks, garage forecourts and “drive-by” locations in response to some of the changes taking place in consumers’ shopping habits (think online ordering and food on the go). Nevertheless, just under two thirds of its stores portfolio is at the centre of one of the most turbulent trading periods for retailers in living memory. He must be getting something right.
Greggs started life in 1951 as a single bread and cakes shop in Gosforth, Tyneside. It is now Britain’s biggest bakery chain, operating from more than 1,900 outlets nationwide.
The first “right” is probably diversity. Although it is best known for its hot sausage rolls, Greggs has introduced healthier ranges, such as salads and low-calorie soups, as well as food for more diverse palates, including oriental chicken and sticky rice and Mexican bean wraps.
The second is basis sales and last week’s unscheduled trading update proved an appetising treat for investors. Total sales over the eight weeks to November 24 were 9 per cent higher than the comparable period last year, with the underlying like-for-like rise reaching 4.5 per cent, an eye-watering increase in the present climate. Taken over the year to date, total sales at Greggs were up 6.6 per cent and the underlying increase was 2.5 per cent. Underlying pre-tax profits will be at least £86 million, against the previous forecast that earnings would be broadly flat against last year’s £81.8 million.
It marked a rather amazing turnaround since May, when Greggs issued an equally unexpected profit warning, citing a weaker market in March and April and cold weather over the winter months that in some cases prevented shops from opening.
And that’s the rub. The speed at which trading can accelerate or deteriorate is a cause for concern, albeit a pitfall that lies in wait for all retailers. Greggs is vulnerable to factors beyond its control, most notably changes in the weather.
The retailer has become skilled at adapting to these conditions, offering a seasonal menu, for example, and being ruthlessly efficient with its costs, cutting expenditure in the first half from £36.4 million to £33.1 million, and improving its cash generation by £5 million to £39 million over the period.
Yet last week’s profits upgrade, enough to spark a 16 per cent jump in the shares, was a relatively modest £4.2 million or so, which could so easily evaporate if trading conditions went against it over the winter months, no matter how adept Greggs is.
Under Mr Whiteside, it is also in growth mode. He reckons that the estate can reach 2,500 outlets, with a 50-50 balance between stores on the high street and those in places such as bus stations and airports. Despite the more balanced mix, of course, the bigger Greggs is, the bigger a weather-related swing will be.
The shares, up 4p at £13.94 yesterday, are not wildly expensive, trading at just under 17 times forecast earnings for a prospective yield next year of 3 per cent, although bearing in mind valuations for other high street retailers they are at the premium end of the food chain. With Greggs shares trading at just below their peak a year ago of £13.99, they look amply valued.
ADVICE Avoid
WHY A retailing class act, but the shares look pricey in the present climate
Northgate
Northgate’s fleet of white vans for hire is still in the workshop undergoing repairs, but possibly not for much longer. There were signs in the company’s first-half results yesterday that it is emerging from a painful reinvention driven by Kevin Bradshaw, its chief executive since January 2017.
Unfortunately for the hire group, however, the turnaround that he has engineered has failed to inject much in the way of vigour to the Northgate share price. The company has been renting light commercial vehicles to tradespeople since 1981. It has a fleet of 108,400 vehicles, split almost 50-50 between its two divisions in Britain and Ireland, its more established operation, and Spain, its powerhouse.
Mr Bradshaw took over a business that, in the UK at least, had lost its way, incapable of capitalising on the shift among van users to lease rather than buy their vehicles. The company’s previous management had grown too reliant on selling off Northgate’s used vehicles quickly in order to generate revenues that would offset declining earnings from hiring out the Transits.
The new boss set about reinventing the sales and marketing process, such that Northgate began to offer highly flexible rental contracts and to price them at a premium as a result. He also extended the holding period for the vans before sale by as much as nine months, as well as increasing the fleet, including by buying 3,400 vans from Tom, a collapsed rival. The strategy meant that profits would take a hit from lower vehicle sales until the rejuvenisation of the hire division was complete.
This process was still washing through the results for the first half, published yesterday, as a 10.7 per cent improvement in hire revenues to £259.5 million was not enough to prevent a 7.4 per cent drop in pre-tax profits to £28.7 million, largely down to lower vehicle sales and the cost of expanding the fleet.
Northgate’s shares are volatile, but, down 10p at 380p yesterday, are worth no more now than they were two years ago. Investors who followed Tempus’s “buy” recommendation in June at 399½p will be out of pocket, at least on paper. Stick with it, though, the profits will come.
ADVICE Hold
WHY Higher hire revenues will shortly translate into profits
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