GREGGS is the largest bakery retailer in UK. The historical company first founded by John Gregg in 1939, and opened its first shop in 1951. After almost sixty years expansion, it becomes a food kingdom providing large range of fresh food for 5 million customers every week in over 1,400 net shops. During this period, a small bakery shop became a food giant with fully developed distribution centers supplying freshness and quality nationwide.
Meanwhile they also faced obstacle on their way to multinational. The failure in Belgium is a warning of their expansion. As the intention to resolve the impact from economic recession, 10 Belgium shops were resolutely closed in last year.
The report analysis GEREGGS' performance in 2008 from their annual report, and evaluate its attractiveness of investment.
Financial Performance
Based on the Consolidated Income Statement (line 1 Appx. 1 [Page 5]), the total sales ended 27 December 2008 increased by 7.1% to £628.2 million (compared to £586.3 million in 2007), including a 4.4% rise of like-for-like sales growth. At the same time, the distribution and selling costs rocketed from £278.7 million (2007) to £306.6 million (2008), by 10 percent. On the contrary, the profit before tax reduced from £49 million to £45.1 million (Line 9 Appx.1 [Page 5] ), a reduction of 7.8% excluding property gains, restructuring costs and exceptional pension credit, which is not very satisfactory but still acceptable under such circumstances, the customers are fragile and losing confidence. Meanwhile, the operating profit dropped by 2.6 percent to £48.6 million (2007: £49.9million). Partly for the reason of the higher Substantial increase in energy and ingredient costs hence more costly of the distribution and selling.
Performance Ratios
In order to measure the performance of GREGGS, there are numbers of ratios for comparison.
2008 2007
Average Interest Rate -64.9% -69.4% (Appx.2, Cal.1, P9)
Cash Flow to Assets 23.6% 31.4% (Appx.2, Cal.2,P9)
Dividend Payout Ratio 44.3% 40.8% (Appx.2, Cal.3,P9)
Earnings Per Share 336.7p 342.8p (Line 12,13 Appx.1 Page 5)
Gross Profit Margin 63.4% 62.3% (Appx.2, Cal.4,P10)
Price/Earnings Ratio 10.5% 13.8% (Appx.2, Cal.5,P10)
Profit Margin 5.4% 6.2% (Appx.2, Cal.6,P10)
Return on Assets 15.4% 16.9% (Appx.2, Cal.7,P10)
Return on Equity 23.0% 25.0% (Appx.2, Cal.8,P10)
Dividend per Share 149.0 p 140p (Line 78 Appx.1 Page,P8 )
Activity Ratios
2008 2007
Asset Turnover 250.8% 246.1% (Appx.2, Cal.9,P10)
Collection Ratio 13.2 12.4 (Appx.2, Cal.10,P11)
Inventory Turnover 12.8 22.3 (Appx.2, Cal.11,P11)
Financing
Debt/Asset Ratio 40.9% 38.9% (Appx.2, Cal.12,P11)
Debt/Equity Ratio 69.3% 63.6% (Appx.2, Cal.13,P11)
Liquidity Warnings
Acid Test (Quick Ratio) 36.7% 40.8% (Appx.2, Cal.14,P11)
Interest Coverage 10.8 12.7 (Appx.2, Cal.15,P11)
Working Capital (Current Ratio) 53.1% 53.7 (Appx.2, Cal.16,P11)
Current Liabilities to Inventory 6.08 7.8 (Appx.2, Cal.17,P12)
Efficiency Ratios
Accounts Payable to Sales 2.3 1.9 (Appx.2, Cal.18,P12)
From the figures above, 23.6 percent of its cash flow contributed to assets. 41 net shops newly set up in 2008, which are slightly more than 34 in 2007. Secondly, the P/E ratio in 10.5% is still acceptable during the vulnerable economic period of global crisis. Thirdly, as a company providing fresh food, the inventory turnover was holding at a distinctive high level. What's more, the working capital of company is lower than favorable line, however it dues to the low inventory and fully use of cash. Eventually, the ROA and ROE ratio were maintaining remarkable at 15.4% and 23.0% respectively. As a investor, GREGGS is an absolutely attractive choice.
Position
According to the assessment of GREGGS' financial performance, a satisfactory result was obtained. The total revenue rocketed above 7 percent, although the net profit is slightly declined compared with 2007. The economic crisis created series of chain actions to the company's daily operation. Since the substantial increases in raw materials, a higher cost of gas, electricity and fuel directly impact on production and distribution. Meanwhile indirect effects also raised the cost throughout the supply chain. What's more, the increasing cost of merchandise affected the cost of its essential components of products, such as flour, meats, wheat, and so on. In order to cover the impact of global inflation, GREGGS improved their efficiency and made adjustment on selling price. Although it is a way to maintain revenue, a risk of challenging customers' brand loyalty merged from such action. Obviously they conquered it well by effective work on quality, freshness, taste and friendly service.
From the figures of last Chapter, the Quick ratio also named Acid test is a part of evaluating liquidity in short term. It indicates if a company has enough short-term asses to cover its current liabilities. A favorable number in most of industries is 1:1, but for a food company running under a tight liquidity (Acid test: 36.7%) is also a common occurrence. Another part is long term, which is also called Gearing ratio, measures the relationship between long term liabilities and shareholders' equity. 19.3% (Appx.2, Cal. 19, P12) is an acceptable level for shareholders, the interests on long term debts is controlled to some extent.
The company was also engaged on improvement of their methods of producing food. For a long time, GREGGS bakery made a majority of its products under its own recipes, hence a considerable regional variation. In the last year, they implemented a programme in order to consolidate their products. By the end of 2009, 80 percent of products would be harmonized across the country. At the same time, they responded effective on customers' demand. Set meal on lower price and innovations of new flavor were introduced to consumers. As well as welcomed pieces such as hot sandwiches and pesto baguette would be expanded into more net shops.
Besides the main service they provided, GREGGS made a remarkable contribution on social responsibility. Firstly it provided a favorable working environment and competitive treatment to employees. They provide range of welfares such as, private medical treatment, psychological consultants, and rewards for people. Secondly, a strategy named ' Making a Difference to Communities' is well performed. The GREGGS' Trust founded in 1987 was still running well on collecting funds to support local charity. In 2008, they raised and distributed £1.8 million helping local communities. The GREGGS Breakfast Club is providing free, healthy food for over 6,000 primary school children.
The activities of improving their products help GREGGS with its marketing position, and the reputation from marking a difference to communities helps them with their social positon. Based on the company's satisfactory performance on financial position, the reasonable target of next year would be well accomplished.
Cash Flow
Take a glance at the Cash Flow statement (Appx.1 Page 7), (49) cash generated from operations was £44 million, a 28.6% reduction by £62 million (2007), £41 million is contributed to (50) acquisition of property, plant and equipment compared with £42 million in 2007, and (59) net cash from financing activities was £36 million (2007) to £15 million (2008).
Cash Flow Ratios
Cash Flow for Investing to Cash Flows from Operating and Financing
56.5% (2008) 43.5% (2007) (Appx.2, Cal. 20, P12)
Cash Flow for Investing and Financing Ratio 7.1% (Appx.2, Cal. 21,P12)
Cash Flow from Sales to Sales Ratio 7.1% (Appx.2, Cal. 22,P13)
Operations Cash Flow to Current Liabilities Ratio 80.0% (Appx.2,Cal. 23,P13)
First of all, 56.5% of funds obtained from operations and finance activities were used in investment. According to company's plan in 2009, there will be an expansion of net shops. The proportion will go up. On the other hands, 7.1 percent of its cash flows were generated from sales. Compared with 10.5% (2007), the increasing cost of raw materials contributed to this difference. Last of all, the operations Cash Flow to Current Liabilities Ratio was 96.8%in 2007, reveals less cash inflows hence more investment of capital.
Conclusion and Recommendation
To sum up, as the biggest food retailer, it suffered a respectable impact from increasing world inflation. Without question, the year 2008 is a crucial point at GREGGS trajectory, where they accomplished an acceptable performance. In the next year, a plan of simplifying operations and making further expansion is well prepared. As figures mentioned before, GREGGS was maintaining a relatively high volume of inventory to balance the impact of rising cost of materials. Under the economic background is straightening up, it would be better to operating at low inventory.
Their first step of financial achievement in 2009 is a 3.2 percent of increase in total sales and a 1.0 percent of like-for-like sales growth by 7th March, 2009. Considering the weather influence on their sales, it is a reasonable objective. However they underestimated the recovery of the economic status and consumers' confidence.
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6Appendix 1. Financial Statements
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12
6
32
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36
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38
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21
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23
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23
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22
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Appendix 2 Calculations
1.
Average Interest Rate =
=64.9% (2008)
2007: =
2.
Cash Flow to Assets =
=23.6%(2008)
2007:
3.
Dividend Payout Ratio=
=44.3% (2008)
2007:40.8%
4.
Gross Profit Margin
=63.4% (2008)
2007:
5.
Price/Earnings Ratio =
=10.5% (2008)
2007:
*GREGGS holds 352,774 (2007: 345,416) shares of ordinary stock at 27 December 2008 of £11,415,000 (2007: £16,235,000).
6.
Profit Margin=
=5.4% (2008)
2007:
7.
Return on Assets
=15.4% (2008)
2007:
8.
Return on Equity
=23.0% (2008)
2007:
9.
Asset Turnover
=250.8% (2008)
2007:
10.
Collection Ratio
=13.2 (2008)
2007:
11.
Inventory Turnover
=12.8 (2008)
2007:
12.
Debt/Asset Ratio =
=40.9% (2008)
2007:
13.
Debt/Equity Ratio
=69.3% (2008)
2007≔
14.
Acid Test (Quick Ratio)
=
=36.7% (2008)
2007:
15.
Interest Coverage =
=10.8 (2008)
2007:
16.
Working Capital (Current Ratio)
=53.1% (2008)
2007:
17.
Current Liabilities to inventory=
=6.08 (2008)
2007:
18.
Accounts Payable to Sales
=
=2.3 (2008)
2007:
19.
Gearing Ratio
=
=19.3% (2008)
2007:
20.
Cash Flow for Investing to Cash Flow from Operating and Financing
=
=
=56.5% (2008)
2007:
21.
Cash Flow for Investing and Financing Ratio
=
=
=7.1% (2008)
2007:
22.
Cash Flow from Sales to Sales Ratio
=
=
=7.1% (2008)
2007:
23.
Operations Cash Flow to Current Liabilities Ratio
==
=80.0% (2008)
2007≔
