Mr Kipling may make exceeding good cakes, as the old ad has it, but its owner Premier Foods cannot seem to make exceedingly good sales.
The company, which also makes Homepride flour and Bisto gravy and earlier this year put its Hovis brand into a joint venture, reported a worse than expected 4.7% fall in overall third quarter sales, with branded goods sales down 4.1%. The upheaval in the grocery market, with the rise of discounters and the widely reported troubles at Tesco and the other big supermarkets has continued to put Premier under pressure and hit its volume and sales performance.
As a result it now expects full year trading profit to be at the lower end of market expectations. Chief executive Gavin Darby said:
Market conditions in the third quarter have proved to be increasingly demanding with unprecedented structural changes across the industry gathering pace.
The company’s statement expanded on this:
The grocery market in the UK continues to experience unprecedented structural change driven by shifts in shopper behaviour from traditional large retail supermarkets to other channels such as value discounter stores, online and convenience.
As a consequence the larger supermarkets have lost share to these other formats over recent months, which has adversely affected the company’s volume and sales performance. Additionally price inflation across the wider grocery market has fallen for the eleventh successive month and is expected to soften further. The company has launched product offerings tailored to these high growth channels to capture some of the growth opportunities.
Meanwhile it is also banking on tweaking some of its best known products. Darby said:
The initial response to the relaunch of our biggest brand, Mr Kipling, has been encouraging and we are implementing a strong programme of new product introductions and consumer marketing in the fourth quarter to coincide with the important Christmas trading period.
The initial response to the trading update, however, was not encouraging. Premier’s shares have dropped 4p or nearly 12% to 30.25p. Analyst Darren Shirley at Shore Capital said:
Premier Foods has reported third quarter trading a little worse than anticipated, with branded sales down 4.1%. Whilst this is an improvement on the 6% reported for the third quarter, it is still below our range of minus 3-4%. The weakness in the branded performance is most evident in the Power Brands, which is a concern in our view, with sales reported down 5.1%. The support brand performance was more resilient at -0.9% decline, though with Non-branded sales of 10.3%, total Premier Foods sales are down 4.7%.
With trade remaining weak, Premier is now guiding to trading profit at the lower end of marker expectations, as such we fully expect to take our forecast down to the £130m-£133m range (from £143m), which would deliver current pretax profit of £80m. Maybe more important are the cash flow implications of today’s update, and the impact on Premier’s deleverage process both in 2014 and beyond.
As such, we place our buy recommendation under review ahead of working through our numbers.
Martin Deboo at Jefferies was a little more positive, saying:
Trading conditions have got tougher again at the third quarter and 2014 profit is being guided to the low end of consensus. But arguably that is already in the price. The real question now is one of how Premier adapts to the new normal in UK Grocery in 2015 and whether they can de-leverage at the required pace in a brutal top line climate. Our belief that they can, plus the room for a modest re-rating, keep us engaged. But this is going to be a lot harder than it looked in March.
