To
Karen Sweet,
Director of Strategy
From
XXXXXXXX
A Brief Report on Financials of Greggs Plc.UK
Executive Summary
While we at Greggs have been witnessing some great growth in sales, revenues, EBITDA etc., there is some room for improvement in few areas like reducing the Admin expenses, which are relatively regarded as high when compared to normal industry standards or competitors.
Year – on – Year changes in Key financial Figures are as below:
Sales revenue 5.45%
Profit before interest and tax 48.59%
EBITDA 24.17%
Profit for the year 55.26%
Dividend for the year 12.82%
Operating cash flow 31.59%
Capital investment 9.17%
Employees -4.16%
Context
External
Where do Greggs do Business?
Greggs Plc. is a Newcastle upon Tyne based “Craft Baker” in UK and it has Quick Service Restaurants (QSR) that servers mainly baked items. It has 1670 Stores across UK and it recently entered into Northern Ireland. Home for about 20,000 employees, its main products are freshly baked pastries, sandwiches and Doughnuts etc.
Who are their key competitors?
Greggs Key Competitors mixture of other “Craft Bakers” including national and international super market’s in-store bakeries, fast food restaurants like Sub-way, McDonalds as well as local and national sandwich and coffee retailers.
What are the relative size/strengths of these companies?
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What is the company’s relative emphasizes on financial, environmental and social performance?
According to their Annual report they have three key areas of social responsibility agenda: “ ‘creating a great place for our people to work’, ‘food our customers can trust ‘ and ‘reducing our impact on the world around us’”(Plc, 2015)
On the environment front they strictly follow “Green House Gas “ emissions set by UK company law in 2006
Internal
Who are (and what is the experience of) the key members of the management team?
Ian Durant – Chairman
Roger Whiteside – CEO
Richard Hutton – Finance Director
Raymond Reynolds – Retail Director
What is the company's structure (how is it divisionalised?)
Greggs Shops
Distribution Centers
Regional Bakeries
Production Center of excellence
Who owns the shares in the company?
Major (Substantial) Share Holders are listed as below
FMR – 5.14%
Templeton Investment Council – 5.00%
Norges Bank – 3.99%
PESTEL analysis
P- POLITICAL
UK government put increasingly strict regulations on the food industry to label the GM (genetically modified) food to label them completely and correctly. These strict regulations make QSR outlets under tremendous pressure. So most of the QSRs including Greggs put more emphasis on the service rather than product stating that customers will never get the service at home that they get in the outlet
E- ECONOMICAL
As UK is struggling to get out of recession, and also people’s income is less, they tend to cut the costs of going to normal restaurants to cut costs; QSRs do better business due to the attractiveness of the low prices. Also in general UK’s fast food restaurants business is growing by 1.7 % per annum, so the current atmosphere is good for Greggs. Also another important economic factor is the low cost of setting up an outlet.
S- SOCIAL
People in UK have a busy life style and particularly in big cities it is even more. So most of the UK population particularly young men find it easy to eat on hoofs. UK fast food chains also pay particular attention to the changing food habits of people and change their menus to suit the changing palettes. Recently as people are becoming more health consciousness, they are adopting more healthy eating style.
T- TECHNOLOGY
As mentioned above (in Political) the regulation of food industry become strict, this increased regulation on health results in food standards of safety to be stricter. So consumers can eat with confident, there by increasing the market. Another Technology improvement is electronic billing (Till) this helps both the buyers and sellers. Buyers don’t need to search for the cash and sellers will get their money within few hours (days).
Greggs also owns and runs its own delivery network systems and their fleet was fitted with “Telematics” technology, which saves them 11% of the fuel. By adopting the latest technology they have less carbon footprint.
Greggs also implemented a “Qudos” management systems and increased their efficiency
E- ENVIRONMENTAL
As Greggs has its own vertically integrated supply of raw materials, it has to take good care of health and safety regulations for animals in accordance with animal rights. Also as Greggs own its distribution and transport network, they save lot of energy in transportation there by helping the environment. Also they are using the paper bags, which makes their image as an environmental friendly
L- LEGAL
As “Health and Safety” regulations are more pertinent to food, all food sellers must abide by these regulations. These political decisions play a very vital role and may affect the industry as a whole.
UK’s food and safety watchdog is FSA (food standards Agency) and it is crucial for all food sellers to follow the regulations of FSA in the interest of public health.
Ratio Analysis
Overview
Overview
For the year 2014 2013 % Change
Sales revenue (£m) 803'961 762'379 5.45%
Profit before interest and tax (£m) 49568 33358 48.59%
EBITDA 91'121 73'386 24.17%
Profit for the year (£m) 37556 24189 55.26%
Dividend for the year(pence) 22 19.5 12.82%
Operating cash flow (£m) 108'552 82'493 31.59%
Capital investment (£m) 52861 48423 9.17%
Total debt (£m) – – –
Employees (people) 19'363 20'204 – 4.16%
As evident from the above table, due to the fact that Greggs has improved inventory management system and working capital, there is a positive change in all of the Ratios. It seems as UK’s current economical situation struggling people have low income and hence less disposable income and this is helping Greggs in increased sales revenue. Rising to the occasion, Greggs has increased its profits by 55.26 % year on year. It can also be observed that they have made some savings by reducing the number of employees by 4.16%
Greggs growth is more than double when compared to the general Annual growth rate of Fast food industry in UK at 2.5 % per year (Takeaway & Fast-Food Restaurants in the UK Market Research | IBISWorld, 2015)
Performance
Performance Profitability
For the year 2014 2013 % Change Formula
Gross Margin 61.46% 59.87% 2.65% GP/Sales
Sales margin 6.17% 4.38% 40.91% PBIT/Sales
Asset turnover 3.01 2.84 6.26% Sales/TACL
Adm expenses to sales 49.22% 49.59% -0.74% Adm Exp / Sales
Return on Capital Employed 18.58% 12.41% 49.73% PBIT(including other income)/TACL
Return on Capital Employed (excl Others) 18.58% 12.41% 49.73% PBIT (excluding other income)/TACL
Sales per employee £41'520 £37'734 10.03% Sales/Employees FTE
Profit per employee £2'560 £1'651 55.05% Profit/Employees FTE
As per the annual report, Greggs has implemented lot of latest technologies like “Telematics “ which saved about 11% of fuel costs and for the smooth flow of operations it has also implemented “QuDos” management systems. The results can be seen in the above table, as there is big jump in sales margin. Although there is a small positive change in Gross margin, it seems it has dramatically reduced the cost of sales resulting in higher sales Margin.
As there are no other income items, ROCE inclusive of other income and excluding other income is same, but it is amazing they have increased ROCE to almost 50%. When we compare with Ocado, Greggs ROCE is much better.
A point worth noting from the above table is by reducing the employees by 4.16 %, Greggs actually increased sales per employee by 10% and also achieved 55% more profit per employee. This shows that Greggs is training their employees very well so that the Turnover is improved.
Also we can notice that the Asset Turnover is better than 2013, but as a percentage change it is less than Ocado (11%)
Although Greggs managed to reduce the Expenses to Sales ratio, it is still lot higher than Ocado (35%). This is one area where Greggs need to look and could reduce the Admin costs.
Working Capital
Working capital
For the year 2014 2013 % Change Formula
Inventory days 18.01 18.38 -2.01% Inventory*Days/Cost of Sales
Debtor days 11.85 11.97 -1.08% Receivables*Days/Turnover
Trade creditor days 105.96 86.15 23.00% Payables*Days/Turnover
Working capital days -76.10 -55.79 36.40% (In.D + Dr.D) – Cr.D
From the above table it can be clearly seen that Greggs has made an improvement on all parts of the working capital and it seems they did not left any stone unturned. To begin with they have reduced the shelving period by 2.01% and then they have managed to improve on getting cash earlier by 1.08%, finally they are succeeded in keeping the money almost 20 longer without paying the suppliers. These things might have dramatic change in their cash flow situations.
Although this is good news for Greggs, it may be bad news to the suppliers, as they will not get money for 106 days. So there is a possibility that Greggs may loose its purchasing power to do the “Economies of Scale “ and in long run this practice ma not be sustainable.
On the other hand Ocado’s Working Capital days are only -3.5 days, which are nowhere near to -76.10 days.
Liquidity Ratios
Liquidity
For the year 2014 2013 % Change Formula
Current ratio 0.99 0.81 23.44% Current Assets/Current Liability
Acid test 0.84 0.61 37.42% (Current Assets-Inv)/Current Liability
Primarily Liquid ratios tell us about the company’s ability to pay its bills. From the above table we can see that Greggs has 99P to pay every 1£ of its liability. Also it can be seen that they are improving a lot on this. This is an indication that Greggs has improved its handling of current assets and current liabilities
From the Acid test we can observe that Greggs has successfully reduced its inventory which helped in improving the Acid ratio to 0.81 (an improvement of 37%)
Solvency Ratios
Solvency
For the year 2014 2013 % Change Formula
Interest cover – 161.9 PBIT/Interest Cost
Gearing – – – Interest bearing Debt/Equity
There is no interest to be paid so interest cover for 2014 is not calculated. However in 2013, long-term finance cost to be received is in negative so it was assumed that this amount needs to be paid, so has been taken and worked out the interest coverage.
Long-term debt data for 2014 and 2013 was not available or it can be understood as zero. In both cases as there is no long-term debt; it is not possible to calculate gearing ratio.
Looking at Ocado’s gearing ratio, it is very high, normal industry range is around 0.2 to 0.4 and 0.5 is already considered as high. This shows Ocado’s interest bearing is debt is high where as Greggs has no debt at all.
B. Comment on Gregg’s performance from an investor’s viewpoint ………
Share Holders View
Shareholders' view
For the year 2014 2013 % Change Formula
Return on equity 15.22% 10.24% 48.6% PAT/Equity
Price per earning 19.57 18.22 7.4% Share Price/EPS
From the above table it can be seen that ROE of Greggs has been improved a lot by about 48%. Also P/E increased by 7.4 %
P/E Ratio
This is the ratio of the market share price (in pence) / Earnings per Share
Obviously if this number could be higher in two cases
A) When the nominator is higher or
B) When is denominator is lower
Now lets do a comparison between Ocado and Greggs P/E
Greggs Ocado
2014 2014
Share Market Price ( in Pence) 732 400
Earnings Per Share (in Pence) 37.4 1.26
P/E Ratio 19.57 317.46
Source:(Greggs share price – Google Search, 2015)
Form the above table it is clear that Ocado’s earning per share is very less when compared with Greggs Plc. Also since Ocado does not give the dividends, from investor’s point of view, Greggs Plc. is a better option. Also investors always look for the appreciation of their shares and share that announces dividends appreciate more in the market.
References
Anon, 2015. Greggs share price – Google Search. [online] Available at: <https://www.google.co.uk/?gfe_rd=cr&ei=CDpfVsGtJorj8wfVnYngCw&gws_rd=ssl#q=Greggs+share+price> [Accessed 2 Dec. 2015].
Anon, 2015. Takeaway & Fast-Food Restaurants in the UK Market Research | IBISWorld. [online] Available at: <http://www.ibisworld.co.uk/market-research/takeaway-fast-food-restaurants.html> [Accessed 3 Dec. 2015].
Plc, G., 2015. Greggs plc Annual Report and Accounts 2014. [online] Available at: <https://corporate.greggs.co.uk/sites/default/files/greggsAR2014.pdf>.
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