Efforts by Greggs to improve its retail systems and processes are “firmly in train”, according to a note from N+1 Singer that predicts a “broadly positive tenor” to its final results on 26 February.
The note says: “The crucial aspect of next week’s finals will be to what extent management can provide further confidence around the self-help strategy to resurrect like-for-likes.
“Operationally, the task to revive growth requires fundamental retail and process related improvements. These are firmly in train and whilst there is execution risk, we are encouraged by the directional momentum to date and anticipate a broadly positive tenor at the finals, albeit recent wet weather may have hindered short term like-for-like progress.
“On balance we see upside risk to our forecasts on a 6-12m view, and scope for the rating to narrow towards similar recovery/high street peers on evidence of positive execution momentum. A 15% FY14 EV/EBITDA discount to peers implies fair value close to 580p (c.7.5x EV/EBITDA).”
The note points out that January’s post close update flagged up full year results to be in line with previous guidance, “so no surprises envisaged”.
“Management will use the finals to outline a number of key targets it will be monitoring to track progress. These are like-for-likes, store investment ROCE, progress in reshaping the estate and efficiency gains.
“We estimate Greggs needs around 2% sales growth to cover cost inflation and 5% like-for-like sales uplift on growth capex to achieve a 20% ROI. We anticipate broadly reassuring current trading commentary given the like-for-like comp after 10 weeks last year was a weak -4%. Our caveat to this is to what extent the recent wet weather/flooding has proved a footfall drag. Our FY14 like-for-like assumption is +1.5%.”
The note said that a key focus next week will be around product initiatives to complement the plan to reshape the estate to a food-on-the-go offering.
“The ‘sweet’ range (15% of sales) was revamped last year. The key focus in H1-14 will be improving the ‘sandwich’ proposition (30% of sales), with a keen emphasis on a hierarchical offering, price points and working towards 50% of the range being a healthy option.
“Structurally, the sandwich category is the most competitive but successfully execution in this area should help underpin like-for-like momentum. Other key 2014 initiatives include; operational excellence around the dominant ‘savoury’ category (35% of sales), revamping and re-launching the drinks offering including coffee, exploring other food-on-the-go categories and modernising the overall branding.”
Regarding forecast and valuation, the note says: “We will review our conservatively struck forecasts more closely at the finals.
“On a 6-12m view we see 4-12% FY14-15 PBT upside risk in the event the recently announced £6m cost savings are not offset by sales disruption during a 12-18m implementation period, and the top-line outperforms. The main risk we envisage is any hike in the minimum wage and like-for-like underperformance.
“We estimate 5-9% EBIT sensitivity to a 1% like-for-like change depending on the LFL driver. The shares are +18% YTD, implying an FY14 EV/EBITDA multiple of 6.6x vs. a 5 year average of 5.6x. Similar Retail ‘recovery’ stories are trading on 8.7x falling to 7.5x.”
