Patisserie Valerie is baking the cake. The trouble is, investors aren’t eating.
Parent company Patisserie Holdings Plc's report Tuesday that sales and profit rose in the year to Sept. 30 wasn't nearly enough to turnaround the shares. While the announcement at one point sparked the largest one-day gain in more than two years, the company's stock has a long way to go -- it's down by about a third since the start of the year.
True, the Brexit vote hasn't stopped the chain's largely female customers, aged 45 and older, from popping in for coffee and cake while they are out shopping. Afternoon tea has been a particular hit.
But investors are fretting about rising costs and weaker consumer spending. While Patisserie Valerie this year was able to offset the impact of an increase to the minimum wage, and its gross margin actually increased to 78.1 percent, the company said that will narrow to 2015 levels of 77.3 percent as higher costs feed through.
The post-Brexit slump in the pound has paved the way for commodity price increases -- the strawberries and cream for that afternoon tea are getting pricier. Although Patisserie Valerie has prepurchased many of its ingredients, including coffee to January 2018, it needs to continue to strike canny deals and find efficiencies to keep prices under control.
Shareholders are right to be cautious. Even after this year's slump, the shares trade on a forward price to earnings ratio of about 17, ahead of cut-price rival baker Greggs Plc and Whitbread Plc, owner of the Costa Coffee chains.
But the bigger risk is that the pickup in consumer prices outpaces wage gains, and eats into spending power. As Gadfly has argued, casual dining in Britain is ripe for a correction, and it's hard to see how Patisserie Valerie can avoid the fallout, even if its goods are a more affordable luxury.
That sweet treat on the shopping trip might be one of the first things to crumble in the face of lower disposable incomes.
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