UK pub operator Greene King PLC (LON:GNK) said the first half was “challenging” with industry-wide cost pressures and poor weather dragging profits and revenues lower.
In the six months to October 15, adjusted pre-tax profit dropped 8% to £127.9mln compared to the same period a year ago, while revenue declined 1.2% to £1.03bn.
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Shares fell 3.15% to 523p in early trading.
But the results were broadly in line with analysts’ expectations and the company has taken action to address higher costs resulting from an increase in input costs, the apprenticeship levy and the living wage.
On track
The group said it was on track to deliver cost savings between £40mln and £45mln after selling 21 pubs and shutting three across the business.
“As previously highlighted, we are facing unprecedented cost increases of £60mln this year, including the National Living Wage, business rates, the Apprenticeship Levy and duty increases,” the company said.
A weaker pound following last year’s Brexit vote has also pushed up input costs but pubs and restaurants are finding it more difficult to pass on this on to hard-hit consumers following sluggish sales.
UK consumers have been spending more cautiously as inflation rises faster than wages, chipping away at disposable incomes.
Competition and discounting
The company’s competitors have been discounting to lure in customers, which has prompted it to launch its own promotions at its pubs and restaurants business to boost sales.
“While it is still early days, through this £10mln investment in value, service and quality (VSQ), we have seen encouraging signs of success with the food cover trend improving by 1.3pts (percentage points) and drink volumes by 2.6%pts in the last six weeks,” the company said.
Poor weather in August and September and the disposal of pubs hit sales at its pubs and restaurants in the first half. Sales in the division dropped 2.2% to £837mln. On a like-for-like basis, sales dipped 1.4%. Operating profit was £136.9mln as the operating profit margin fell 1.7pts to 16.4%.
Its Pub Partners business, which includes tenanted and leased pubs, saw revenue fall 1.6% to £92.1mln and operating profit drop 0.2% to £43.6mln following the sale of pubs. The operating profit margin, however, rose 0.6pts to 47.3%.
Brewing & Brands revenue grew 7.9% to £102.3mln and operating profit was flat £14.8m as the operating profit margin fell 1.1pts to 14.5%.
Operational performance improves post-period
"The first half was challenging for our managed pubs, but our actions to strengthen performance have produced an improvement since the period end,” said chief executive Rooney Anand.
"We have committed additional investment to enhance the customer experience, including being more competitive on price, having more team members available at key times and strengthening local marketing activity."
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Anand added the company will continue to benefit from cost savings and to improve investment returns to more than 25% from rebranded pubs.
For the full year, the group expects to raise disposal proceeds of £90mln to £110mln while it anticipates spending of £125-140mln on revamping pubs.
It will also spend £30-40mln on its brand optimisation programme to target higher returns. New build capital expenditure is expected to be £30-40mln and freehold reversion investment is forecast to reach £10mln.
Greene King left its interim dividend unchanged at 8.8p each.
ShoreCap sees 'significant opportunity'
"Greene King is inexpensive and although trading remains difficult we see significant opportunity in both the balance sheet and improving operational performance through investment," said Shore Capital analyst Greg Johnson.
ShoreCap left its rating at 'buy' and target price at 730p. The broker continues to expect pre-tax profit of £256mln for the full year.
"With the cost outlook unchanged, and signs of improved trading we are unlikely to change our underlying assumptions for a 1% LFL sales decline in the managed division," said Johnson.