Greene King's weaker sales and gloomy pubs outlook drags down sector
Greene King was crying into its beer as takings from its pubs shrank in the first 18 weeks of the year the coming months offer little chance of a top-up amid weaker consumer confidence, increased costs and increasing competition.
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Like-for-like sales from the FTSE 250 group's owned pubs dropped 1.2%, worse than the market's 0.7% decline.
LFL sales had been more solid in the first ten weeks of the new financial year but trading weakened since the second half of July as the weather worsened.
On the upside, LFLs at its tenanted and leased pubs were up 1.4% over 16 weeks and its brewing arm outperformed the wider ale market as it dripped only 0.5% lower.
"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," the company said in a statement ahead of its annual general meeting on Friday.
In the longer term, the brewer expressed confidence that it would be able to deliver "competitive advantage, growth and attractive and sustainable dividends for our shareholders" as the benefits of its acquisition of the Spirit pubs flow through alongside, a brand conversion programme that is delivering returns in excess of 20% and another programme to deliver £45m of cost savings this year that was said to be "on track".
Greene King shares were down more than 14% in early trading on Friday and by 1030 BST were almost 13% lower at 574.29p, with peers Mitchells & Butler, JD Wetherspoon, Fullers and most of all Marston's all pulled down with it.
The Suffolk-based brewer stressed that it still had a robust balance sheet and a strong cash generation history, and attributed most of the LFL sales decline at the pubs division, which includes the Hungry Horse, Chef & Brewer, Farmhouse Inns and Flaming Grill, as well as Greene King Local Pubs, to a fall in sales of 'value food', although recent weeks saw "some softening across other segments".
Management said they were "continuing to address the challenges of the value food sector through measured capital investment to upgrade and reposition pubs and through selective disposals".
Analyst Jamie Constable at N+1 Singer said investors "always raise an eyebrow when a company blames the weather" and said there was also negative read-across in the leisure sector to Restaurant Group.
He felt that the most worrying aspect of today's update is reference to the 'value' segment being pressurised, "effectively referencing their dominant Hungry Horse brand which looks to have gone ex-growth... is this the next Frankie & Benny's?".
He said the warning further explains why Greene King acquired Spirit -- "they needed it!" -- and wondered if investors will start to question the sustainability of its dividends, which are covered 1.7 times based on free cash flow but excludes expansionary capex as it is discretionary. "If you include this Marston's DPS is uncovered and GNK just about covered."
Karl Burns at Investec downgraded his Greene King earnings per share estimates by circa 3-7% for the current and next two financial years.
"We believe EPS momentum remains limited given the weak LFL backdrop and high cost pressure environment, though the yield should provide some support to the share price."
Neil Wilson at ETX Capital said the trading update was another sign of the UK weakness in consumer spending and confidence. He expect a return to year-on-year growth this time next year when the World Cup comes into play but said it was "yet another sign that the squeeze on consumer spending is hitting company profits".