Compass Bounces Back But Warns On Margins

 Namnews, 21st November 2022

Compass delivered a big rise in profits during the past year as its recovery from the effects of the pandemic surpassed expectations. However, the catering giant is forecasting a 2023 margin below analysts’ estimates as inflation takes its toll.

“We can restore the pre-pandemic margin, but the pace of that will really depend on the level of new business wins… and also when we see inflation start to come off a little,” said Chief Executive Dominic Blakemore in an interview with Reuters after the release of annual results.

Like many firms, Compass has been grappling with higher costs of food and labour. It has been tackling soaring inflation by changing ingredients, such as switching from sunflower oil to rapeseed oil in the UK and reducing the number of menu options.

The economic environment also means more companies are outsourcing their canteen needs, helping Compass gain new business and retain clients at a record rate.

Compass, which serves office workers, university students, and hospital patients across 40 countries, said new business wins increased to £2.5bn, and first-time outsourcers accounted for about 45% of that, while the rest moved from competitors or smaller players.

Blakemore said conversations with clients include ways to reduce costs by cutting menu options, reducing portion sizes and limiting food waste, apart from price increases.

Compass forecasted underlying operating margins of above 6.5% in 2023, compared with analysts’ average estimate of 6.9%.

“Compass needs to take a pragmatic view to this, because if it raises its prices too high then some of the benefits its customers enjoy start to evaporate,” said Hargreaves analyst Derren Nathan.

Compass said it expected underlying operating profit growth on a constant-currency basis of more than 20% this year, surpassing pre-pandemic levels.

After being hit hard by the Covid Lockdowns, revenue and volumes at Compass have already topped 2019 levels.

Over the year to 30 September 2022, the group reported adjusted operating profit up nearly 87.5% to £1.59bn, beating the £1.54bn company-compiled analysts’ estimate.

Underlying revenue rose 37.5% to £25.8bn, surpassing pre-pandemic levels and beating an analyst forecast of £25.8bn.

“North America continues to perform strongly, and we are particularly pleased with our progress in Europe, which is benefiting from an increased focus on growth and retention, supported by investments in our people, brands, and processes,” said Blakemore.

“Looking further ahead, we remain excited about the significant structural growth opportunities globally, leading to the potential for revenue and profit growth above historical rates, returning margin to pre-pandemic levels and rewarding shareholders with further returns.”