Departing Premier Foods commercial director Ian Deste proclaimed that the “turnaround phase is complete” and the “transformational phase” has begun after this week’s restructure.
The question now is what will it take for investors to buy into this transformation?
Premier has made undoubted progress this year – including a well-supported £1.1bn refinancing deal in March and spinning off Hovis and its powdered businesses into joint ventures.
Nevertheless, the supplier’s share price has been hammered this year, dropping over 70% since Morrisons’ profits warning in March. This negativity sentiment has hung around the firm despite no broker currently having a sell rating on the stock due to the hugely suppressed share price.
So how significant is Premier’s restructure this week into three business units - Grocery, Sweet Treats and International – in the company’s quest to turn the tide on its share price?
The structural and managerial changes are probably better seen as a codification of its existing strategy rather than a dramatic shift in priorities. The divestment of its Hovis and powdered businesses have effectively already resulted in the company focussing on the two distinct categories of sweet and savoury goods. Premier’s intent to grow its penetration into China, Australia and North America has also been well flagged this year.
So the restructure does not represent a radical change, but it does represent the next step on the company’s ongoing effort to streamline its business to become more entrepreneurial, agile and able to respond to changing consumer demand. Giving the heads of these three business units the autonomy to run their distinct divisions will help in that regard.
Early investor reception to the move is at least somewhat encouraging, with Premier back up 2p to 40p since the announcement after hitting a multi-year low of 38p on Monday.
But the elephant in the room for Premier remains its weak sales momentum. For all the positive steps it has taken, the share price will only rebound when investors believe sales volumes have begun to rebound (or at least stabilise).
In the first half, overall revenues were 6.1% down and its so-called ‘power brands’ were down 4.9%. Premier predicted 2–3% growth in power brands for the full year (partly thanks to a back-loading of NPD and marketing in the second half), but until that revenue lift comes through Premier will continue to be viewed as a prime victim of the supermarket price war.
Analysts and Premier themselves have played down the impact of the price war on revenues – the price of Premier’s brands has remained stable (with supermarket cuts focussed on own-label staples) and the supermarkets are yet to pass on their own margin pressures to branded suppliers in a significant way.
But investors just aren’t buying the argument and remain convinced Premier is in the eye of a supermarket storm – particularly with Dave Lewis’ arrival at Tesco potentially setting off another round of price cuts.
As Deste suggests above – Premier is emerging from a period of retrenchment and the next phase must now be a return to growth. Bearing in mind the company’s debt pile, that growth will have to be primarily organic, which is a big ask for any supplier in the current market.
Given the current level of food deflation and the woes of the supermarkets it is difficult to blame investors for holding fire on backing the firm’s turnaround until the evidence of recovery is on the P&L for all to see.