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Greencore rally brought to a halt by sushi slump and rising wages

Shares in the group slid by as much as 9% this week as investors digested results

Greencore’s share price rally of as much as 60 per cent in past year – to recover a fifth of the ground lost over the previous three – has been quite something. The UK’s largest sandwich maker has clearly benefited from a return of more workers to the office and a spike of second-jobbers, seeking to make ends meet, grabbing something quickly as they rush from one role to another.

Dalton Philips, the Dublin-based, London-listed group’s chief executive of a little over a year, has also made his mark, stabilising a business that had barely recovered from an embarrassing reversal of a decade-long bet on the US market (that business was sold in late 2018), when it was hit in short order by the pandemic, supply-chain and labour issues and inflation.

The group reported this week that its adjusted operating profit rose 5.7 per cent in the year to September, to £76.4 million (€88.7 million) – slightly ahead of the raised guidance it had issued in early October.

We’d always been a business that have taken and held [contracts] at any cost. We have had to really rethink that and say, ‘No, look, just we’re just going to walk away from it’

—  Dalton Philips

The result was helped as Philips culled 250 management roles across a business that employs about 14,000 mainly low-paid workers; either passed on to supermarkets or found other ways to offset more than £200 million of inflation costs; and walked away from a number of contracts – totalling £110 million of sales – that were making little or no money.

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This wasn’t previously in the DNA of Greencore, whose customers span from German discounters such as Aldi to the more upmarket Waitrose chain. “We’d always been a business that have taken and held [contracts] at any cost,” he told analysts on a call. “We have had to really rethink that and say, ‘No, look, just we’re just going to walk away from it’.”

When Philips joined, almost a quarter of the group’s total sales volumes were coming out of plants that were essentially loss-making. That’s since been halved to 12 per cent. The group’s previously limp longer-life salads business has been one of big turnarounds, as it cut back on waste and improved automation.

The Wicklow man sold the former Irish sugar group’s last trading asset here, the Trilby vegetable oils business, in September for a final net cash consideration of £6.1 million.

He’s also put managers of remaining underperforming businesses on notice.

“We love all our children, but sometimes not equally – so, people have got to pay their way,” he said.

Greencore’s sandwiches, wraps and rolls sales volumes rose 3.5 per cent in the year to the end of September, compared with a 0.7 per cent contraction of the wider UK market.

A recent report from global recruitment agency Hays found that 43 per cent of UK employees were working entirely from the office in September, up from 36 per cent a year earlier, to overtake hybrid working (40 per cent) for the first time since the onset of the Covid-19 crisis.

So-called premium sandwiches are flying off the shelves – with volumes up 34 per cent during the financial year – as supermarkets M&S and Sainsbury’s push meal deals such as a steak and caramelised onion sandwich and a drink for £5.

But there’s a limit to trading up. The group’s sushi sales fell by a “double-digit” percentage as soaring fish prices have made it prohibitively expensive for many. Still, Philips insists Greencore is sticking with this line of business. “There’s essentially a ceiling on price that consumers can tolerate at the moment, and we’re kind of getting squeezed in that. But I would see sushi being a part of our proposition going forward.”

Shares in Greencore slid by as much as 9 per cent this week as investors digested the results and analysts were given no reason to upgrade their earnings forecasts.

There’s a whole tonne of stuff, when you think about all the day-parts we’re not in. We’re not in breakfast, for example. Retailers want us to be in them and we can be in them

—  Philips

While Philips has outlined that he wants to rebuild operating profits over the next three years to Greencore’s pre-Covid level of £106 million, that is already what the market has priced in, following a strong run by the stock in the past six months.

There are plenty of risks. HSBC analyst Doriana Russo said that an almost 10 per cent hike in the UK national living wage – announced last week and set to take effect in April, to bring the total increases since 2019 to 33 per cent – will add £30 million of annual costs that the group will need to offset elsewhere.

Philips’s longer-term growth plans may also see the group return, sooner or later, to the acquisitions trail as he looks for “attractive adjacent” categories to the range that it already has, including chilled curries, pasta dishes, soups, sauces and quiches.

“I see a lot of opportunities. There’s a whole tonne of stuff, when you think about all the day-parts we’re not in. We’re not in breakfast, for example,” he said. “Retailers want us to be in them and we can be in them.”

But for now, some analysts, such as Charles Hall with Peel Hunt in London, are advising clients to avoid putting any more Greencore shares in their baskets. He downgraded his rating on the stock in recent days from an add (buy) to a hold.