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Greene King shares tank as sales fall on bad weather and weak consumer spending

Greene King reported a 1.2% drop in like-for-like sales in its Pub Company division in the first 18 weeks of the year
Greene King
Greene King is offloading some of its businesses to cut costs

UK pub operator Green King PLC (LON:GNK) shares slumped after saying that sales have been hit by weak consumer confidence, poor weather and competitive pressures.

Shares dropped 12.01% to 576.50p in early trading. 

The group’s Pub Company division saw like-for-like sales fall 1.2% in the first 18 weeks of the year against a market that declined 0.7%, driven by drop in so-called 'value food' sales.  

Pub Company operates pubs, restaurants and hotels in the UK such as Hungry Horse, Fayre & Square, Farmhouse Inns, Flaming Grill and Greene King local pubs.

Excluding Fayre & Square, which is being rebranded this financial year, like-for-like sales fell 0.9%.

In the first 10 weeks of the year, like-for-like sales were flat as expected despite tough comparisons last year during the 2016 UEFA European Championship.

READ: HSBC cautious on UK pubs, calls time on Greene King and JD Wetherspoon ratings

Bad weather dampens sales

Trading has weakened since the second half of July when the weather worsened.

“Over the course of the year so far, most of the LFL sales decline can be attributed to value food, although more recently we saw some softening across other segments,” Greene King said in a statement.

“We are continuing to address the challenges of the value food sector through measured capital investment to upgrade and reposition pubs and through selective disposals.”

On the back of its efforts to offset sluggish sales, the company said it is on track to deliver £45mln of cost savings this year.

Consumer spending hit by rising inflation 

The food industry has come under pressure from fierce competition and rising cost inflation, driven by a weaker pound since the Brexit vote last year. Higher inflation has also meant consumers have been tightening the purse strings and eating out less.  

Greene King said its cost saving programme will help to reduce the impact of the weaker-than-expected sales by limiting margin declines from unprecedented industry cost pressures.

Its savings programme includes cost synergies from its £1.32bn takeover of Spirit Pub Company in 2015.

READ: Greene King's full-year profits fall on Spirit Pub integration costs, but revenues up after stronger fourth quarter

In contrast, the company said its other two businesses, Pub Partners and Brewing & Brands, have achieved “strong returns and cash”.

Pub Partners, which provides support services to licensees, reported a 1.4% increase in like-for-like net profit in the 16 weeks to 20 August with the impact of its maintenance, repair and operators in line with expectations.

In the Brewing & Brands arm, own-brewed volume dipped 0.5% over the same period against a UK ale market down 2.9% and a cask ale market down 7.0%

Greene King remains cautious

“We remain cautious about the trading environment and expect the challenges of weaker consumer confidence, increased costs and increasing competition to persist over the near term,” Greene King said.

“In the longer term, utilising the benefits of the Spirit acquisition, our brand conversion and cost saving programmes, our robust balance sheet and our strong cash generation will be important levers to help deliver competitive advantage, growth and attractive and sustainable dividends for our shareholders.”

Liberum left its rating at 'buy' and target price at 780p, saying that the company is responding to sector-wide challenges by re-positioning away from value food and driving cost synergies. However, the broker acknowledged that investors may have to wait for the second half for earnings momentum to return.

Neil Wilson, chief market analyst at ETX Capital, attributed Greene King's sales decline on another poor British summer. 

"June was hot and dry but since the second half of July the wet weather has kept boozers away from pub gardens," he said.

"The lack of a major football tournament this year will also be a factor. Expect a return to year-on-year growth this time next year when the World Cup comes into play. But it’s yet another sign that the squeeze on consumer spending is hitting company profits.”

 

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Article
February 10 2017

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