Interactive Investor

Premier Foods tumbles after sales warning

18th June 2014 13:37

Ceri Jones from interactive investor

Shares in Premier Foods plummeted by 8% on Wednesday morning to 528.7p after the company warned that sales of its main brands, including Mr Kipling, Ambrosia desserts and Bisto gravy, had slumped in the second quarter of its financial year. The shares have almost halved in three months.

In a trading update that fell just short of an actual profit warning, Premier blamed "subdued grocery markets" for an unexpected fall in sales of what it calls its "power brands", which also comprise Batchelors, Oxo, and Loyd Grossman and Sharwoods sauces.

Premier scrapped its earlier forecast for a 2-3% annual sales increase for the brands, and is now relying on cost cuts to help it achieve full-year profit expectations.

Some of this will be derived from improved efficiency of its manufacturing infrastructure by greater use of its Knighton and Ashford sites, and separately, the consolidation of grocery logistics network which will reduce transportation road miles by around 750,000 by the end of the year.

The UK grocery market has been severely disrupted by the rise of discount retailers such as Lidl and Aldi, and the major supermarkets Tesco, Morrisons and Asda are fighting back with an aggressive cut-price war, a scenario that has led to the lowest growth in the supermarket sector in 11 years.

Premier took on heavy debts before the financial crisis by acquiring a string of well-known food brands. In March it raised £353 million from a placing and it has hived off Hartley's jam, Sun-Pat peanut butter and Branston pickle to help pay down its loans.

Premier also on Wednesday announced another joint venture, this time with Specialty Powders. The new venture will produce Premier's private-label business in powdered beverages at Premier's factory in Knighton, Staffordshire.

Premier's Brown & Polson home baking brand will be licensed to the joint venture for five years, and during that period the joint venture will have an option to buy Brown & Polson for £2.75 million. The Bird's, Angel Delight and Marvel brands will stay with Premier.

The company said the decision would have little impact on its profits, as that division made a loss of £0.7 million last year. However, the transaction will eat up restructuring costs of approximately £4 million this year, and require £1 million of capital expenditure which the company said will be accommodated within current capital plans.

Premier conducted a similar transaction earlier this year, putting Hovis into a joint venture with US private equity group Gores and cutting its holding to 49%.

The key to these results is that although profit expectations for 2014 remain unchanged, cost control alone cannot be the long-term solution. The problem seems to have more to do with the brands themselves which hark back to the 1970s when eating habits were very different.

Investor view

On the Interactive Investor discussion board, 'The Buzz' said: "After the initial flurry of activity (this morning), with one million shares traded, the shares seem to have quietened down with a wide spread of 53.25-54p.

"An initial steep fall as anticipated. This still is a yo-yo share."

Related Categories

    UK shares
    Consumer goods and services
    Infrastructure