Compass sees Q3 margin improvement as interims slump

Catering giant Compass said it expected a gradual recovery in third quarter margins after interim profits and revenue slumped due to the coronavirus pandemic.

The world's biggest caterer, which provides meals to schools, hospitals work canteens, universities and sports events, also said it was repaying government £25m in furlough cash.

Revenue fell by 32.4% to £8.4bn and underlying operating profit decreased by 64.5% to £290m due to the adverse impact of Covid and related actions to resize the business and adjust costs. On a statutory basis, profits fell by 78.3 per cent £168m.

Compass said it expected gradual improvement in revenue and an operating margin of between 4.5% and 5% in the third quarter and was confident in rebuilding group underlying margin to above 7% before it returned to pre-Covid volumes.

It did not specify how much it received in under the job retention scheme, but did report £119m in furlough payments and tax deferrals.

"With the gathering pace of vaccination rollouts across our major markets, we are working closely with our clients to prepare to reopen their sites safely, although the picture across the world remains mixed," chief executive Dominic Blakemore said.

“With vaccination rollout underway in our major markets, we are encouraged by the easing of restrictions so we can now focus on working alongside clients to safely reopen their organisations.”

Blakemore said the firm had lifted new business wins by a fifth on the back of a big uptick in outsourcing by companies. First-time outsourcing now accounted for half of new contracts, up from a third historically.

Compass before the pandemic it employed 600,000 people in 45 countries serving 5.5bn meals. It has laid off 7,000 of its 50,000 UK employees.

The company's reputation took a battering last year after outraged parents posted photographs of some school lunches provided by its Chartwells unit that showed meagre offerings for children, and described as "disgraceful" by government ministers.

Harry Barnick, analyst at research firm Third Bridge Compass has an "overreliance on corporate demand for food services, which has been decimated by a newfound appetite for homeworking in the UK and the US".

"Corporate foodservice demand is forecast to recover more slowly compared to other segments such as healthcare and education. Our experts expect corporate demand for food service to be structurally smaller post-covid whilst businesses reorganise themselves around employee demand for home and hybrid working," he said.

Barnick said the group's ability to expand into new categories, such as delivery, would be "fundamental", but warned that it faced stiff competition from aggregators in the UK and the US, "which threaten its evolution in this area".

"Investors will be paying close attention to any potential M&A in the market post-covid. Given its size, Compass could play a key role in consolidating the sector," he added.