First quarter sales figures at Northern Foods were "surprisingly, indeed worryingly, poor", according to City analysts.
The firm, which posted a 1.6% drop in like-for-like sales in the 13 weeks to July 3, blamed a 24.9% slump in underlying sales in its frozen division on its exit from the Birds Eye co-packing contract last year and a 5.6% drop in bakery sales on reduced promotional activity.
On the plus side, however, underlying revenues in the chilled division were up 14.3%, driven by a strong performance in sandwiches and salads and "continued steady improvement" in ready meals.
Shore Capital said the firm had posted "a surprisingly, indeed worryingly, poor trading update". It added: "We are concerned by the near 25% fall in sales, taking into account the exit of what management calls “marginal business”.
"We believe the exit of the Birds Eye contract contributed about 10% of the sales decline, which has now annualised, though with other business exited, and the Goodfella's [pizza] relaunch a slow-burn, management is not targeting a return to growth until the fourth quarter of 2010/11 at the earliest."
The fall in bakery sales was also a concern, with "volumes declining close to 10%", claimed analyst Clive Black, "though we are more comfortable with this as it reflected lower promotional activity during the World Cup [during which time category promotional activity declined from 50% to 30-35%, he claimed]."
"With promotions now returning to more normal levels, we would expect a return to sales growth in bakery through the second quarter."
Automation at Fox's Biscuits
Northern Foods boss Stefan Barden (pictured) said the programme of investment in "new automated technology" at Fox's Biscuits was "expected to complete early in our 2011/12 financial year."
He added: "Our first half year will see incremental investment, principally in our Goodfella's pizza brand, and in automation at Fox's Biscuits, which is progressing well to enhance future earnings and strengthen our competitive position."
While he expected "continued challenging trading conditions", Northern Foods was "continuing our investments to position the business for growth", he added.
The investment in automation was encouraging, acknowledged Black. However, the proof would be in the pudding.
"There may be promise but at some stage there needs to be greater evidence of delivery, otherwise we will have to start thinking in earnest about changing our dividend expectations for Northern Foods."