Compass Group's first-half disappoints, shares tumble

By Radhika Rukmangadhan

(Reuters) - Compass Group Plc (CPG.L) missed first-half earnings expectations on Wednesday hurt by stagnant revenue and a steep decline in margins in Europe, sending shares in the world's biggest catering firm lower.

Underlying operating profit rose by 4.5 percent to 875 million pounds, below the 892 million expected by Morgan Stanley analysts and the 886 million expected by RBS Capital Markets.

In Europe - which makes up about a quarter of Compass' revenue - profit fell by 9.6 percent on a constant currency basis.

The group's operating margin declined 10 basis points to 7.5 percent as growth in the UK was offset by inflation and restructuring costs.

"Inflation and cost of change actions in the UK, along with the impact of extreme weather across the region (Europe), were not fully offset by pricing and efficiencies," Chief Executive Dominic Blakemore said in a trading statement.

Shares in the FTSE 100 listed company fell as much as 6.7 percent to 1,477.50 pence in response, marking their largest intraday percentage decline in nearly 4 years.

The results for Compass follow a well-flagged fall in first-half core operating profit at its nearest rival, France's Sodexo, which has launched a reboot this year aimed at bolstering sales and margins.

Sodexo last month cut its full-year sales and profit margin outlook after a weaker-than-expected second-quarter. Its organic revenue rose just 1.7 percent in the first half, compared to a 4.8 percent rise at Compass, which was helped by expansion in its business supplying old people's homes and schools in North America.

"While the company's description of growth in the healthcare & seniors and education subdivisions in North America was somewhat vague, Compass is certainly not experiencing issues in these businesses to the degree which caused Sodexo to profit warn recently," Morningstar analysts said in a note.

Sodexo shares, down by a third since the middle of last year, were down 1.2 percent in morning trade in Paris.

Compass, which provides meals for office workers, pensioners, soldiers and school children around the world, lost long-time chief executive Richard Cousins in a seaplane crash on New Year's Eve.

Cousins was seen as the architect of the company's success over the last decade and analysts and investors are watching the company's performance closely under his replacement Blakemore for signs of how business will now pan out.

The company reaffirmed its full-year forecast. It said it expected to see the benefits in the second half from actions it has taken to address cost pressures in its home market.

(Reporting by Radhika Rukmangadhan in Bengaluru; editing by Patrick Graham and Jason Neely)