Free school meals provider Compass charts course to better margins after revenues sink
FTSE-listed catering giant Compass Group has forecast better margins in the second quarter than in the first, as it trimmed costs to cope with an expected hit to revenue from most schools and offices remaining shut.
The world’s largest catering company had a tough 2020 as lockdowns ate into the revenues of food services contractors, and its free school meals provider Chartwells caused controversy in the UK.
Compass said that its revenue contracted by 31 per cent in the first six months of its financial year, as Covid-19 continued to hammer the food service company.
The company revealed that the hit has eased somewhat from 33.7 per cent down in the first quarter, to 28 per cent down in the second.
Revenue at its sports and leisure business, down 73 per cent, was the worst hit, while the healthcare and seniors unit rose by one per cent, the only category to grow during the half.
To soften the coronavirus blow, Compass has had to cut jobs and manage its food costs by “careful” menu planning, and by reducing suppliers and the number of products it buys.
Compass said its operating margin for the second quarter ended 31 March is expected to increase by about 130 basis points to about four per cent, compared with 2.7 per cent in the previous quarter.
Its half-year organic revenue was expected to drop 31 per cent, with the UK-based company warning that foreign exchange translation could impact revenue by £456m.
Compass came under fire in the UK recently when the meagre contents of school lunch parcels prepared by its Chartwells unit were shared, and then widely condemned, on social media.
In the trading update outlining its expectations for the second quarter and half year, Compass said it has been operating at about 71 per cent of its 2019 revenue in both the periods.
“We are controlling the controllable by managing our costs, adapting our operations and resizing our business,” said the company, which serves office workers, school kids, seniors in old age homes and armed forces across dozens of countries”.
Shares in the catering company are currently up 1.26 per cent to 1,488p in London.
Steve Clayton, manager of the Hargreaves Lansdown Select UK Growth Shares fund, which holds Compass Group shares said:
“Compass cannot make office canteens fill up, nor fans turn up at US sports stadia. That is for governments to decide as and when the pandemic allows. But they can control their own costs and the margin progression in recent months is encouraging.
“The group see operating margins heading back up above seven per cent once the world returns to pre-Covid levels of activity. If they achieve that then Compass will have bounced back better and will be well set to exploit the ongoing structural growth opportunities in the global contract catering industry”.