Greene King warns of tough trading

GREENE King yesterday became the latest player to warn of tough trading conditions in the embattled pubs sector - despite announcing improved sales and profits for the past year.

The Bury St Edmunds-based pubs and brewing group reported revenue of £960.5million for the 53 weeks to May 4, up 5% on the previous year's total, while profit before tax and exceptional items was 2% ahead at £142.0million.

Chief executive Rooney Anand said that, despite “an unprecedented set of challenges for the industry” during the past year, the figures represented an “exceptional performance across the business”.

However, he warned that, with the economy not likely to improve in the short term, the group was “not immune to the difficulties this presents for our market”, although he added that the company remained “better placed than many others”.

Greene King also provided some further cheer for investors by revealing that detailed discussions with HM Revenue and Customs had taken place about switching to real estate investment trust (REIT) status, offering tax exemption on property profits and potentially allowing for higher dividend payments.

The company said HMRC had advised that the move could be made without demerging the group's managed pubs arm, although directors still needed to be convinced it would deliver “real long-term economic value”.

Greene King Retail, the group's managed pubs and restaurant division, saw revenue increase by 6% to £578.7million and operating profit by 5% to £116.5million.

The operating margin was by 0.1 of a percentage point year-on-year, mainly due to the addition of the largely leasehold Loch Fyne estate of seafood restaurants, acquired last August. Excluding this, margins were up 0.5%.

Total like-for-like sales were down1% but like-for-like food sales were up by more than 2% while total sales of food and food-related drinks represented more than half of all retail sales.

The number of sites trading within the division grew from 788 at the start of the year to 792 at the end, with the addition of the 36 Loch Fyne sites being offset by disposals and transfers to other parts of the group.

At Pub Partners, the tenancy/lease division, revenue was up 2% at £167.2million and operating profit was 9% ahead at £81.4million.

This was reflected in a 3.1% increase in margins although, on a like-for-like basis, profit was unchanged year-on-year. The number of pubs within the division rose from 1,417 at the start of the year to 1,474 at the close, mainly due to the group's acquisition New Century Inns last November.

Belhaven, the group's integrated pubs and brewing business in Scotland, achieved 8% growth in revenue during the second year of the ban, to £126.1million. Operating profit increased 18% to £27.5million, with the operating margin improving by 1.8%. The number of pubs trading grew from 299 to 321.

The group's Brewing Company, representing beer produced at the Bury St Edmunds brewery and the supply of other drinks to the on-trade, saw revenue fall by 3% to £88.5million and operating profit by 6% to £21.6million. Margin dipped by 0.8%, although the group said the rate of return remained a “sector-leading” performance.

Greene King said that, after a strong first half to the year, the second half had been more difficult, with sales of third-party lager and other drinks declining year-on-year although its own brands had performed strongly.

As a result, despite a 5% decline in the overall UK beer market, Greene King said it had grown both its absolute volume and its market share during the year, with sales of its leading brands, Greene King IPA, Old Speckled Hen and Abbot Ale, up by 4%, 9% and 12% respectively by volume.

Looking ahead, Mr Anand acknowledged that the group faced a challenge if it was to continue its 40-year unbroken record of earnings growth into 2009, but said “we never plan to deliver earnings decline”.

The group's businesses were trading in line with expectations so far during the current year and, while cost pressures continued, the group believed its margin and cash focus would allow it to minimise the impact of these.

“We are better placed than many others due to the resilience and flexibility of our business, and as a result we remain confident of meeting our expectations for the year,” he added.

Keith Bowman, equity analyst at Hargreaves Lansdown, said Greene King's results may add “a glimmer of cheer” to the downbeat pub and leisure sector.

He cited Belhaven's performance in Scotland - where the smoking ban was introduced in March 2006 - as evidence that the initial gloom from the restrictions was beginning to lift.

“Overall, like just about every consumer facing business, management at Greene King remain cautious regarding the near term future,” Mr Bowman said.

“However, Greene King is a far more diverse business - both via product and location - than that which traded just ten years ago and management remain confident that the group will continue to out-perform rivals.”