Shares in Compass Group fell 4% on Tuesday 25 July even after the firm maintained its annual outlook and reported a 15% jump in third-quarter organic revenues, as its update fell short of investors' hopes.
The world's largest catering group said it had benefitted from new business, higher prices and strong demand in Europe during the third quarter, and kept its full-year guidance for underlying operating margin and organic revenue growth in place.
Analysts at Barclays said investors may have been looking for more from the update, which was broadly in line with expectations. Compass shares were down 4% by 0922 GMT on Tuesday 25 July.
"Whilst inflation remains elevated, we are making margin progress by mitigating cost pressures, pricing appropriately and benefiting from operational leverage," the company said in a statement.
Compass, whose food service brands cater to offices, universities and sports stadiums across 40 countries, emerged bigger from the pandemic as new clients turned to the contract caterer amid high inflation.
But elevated levels of inflation, especially on food items, has also been a drag on margins at Compass. It aims to return its margin to pre-pandemic levels of around 7%.
It expects an underlying operating margin of between 6.7% and 6.8% for the year ending September 2023. Analysts on average expect 6.8% in 2023 and 7.1% in 2024, according to a company-compiled consensus of estimates.
Finance chief Palmer Brown told analysts on Tuesday 25 July Compass' margin progress could slow in future if inflationary pressures continue.
In the longer term, Compass said it expects to return to historical margins and for profit growth to be above revenue growth. It forecast full-year organic revenue growth at 18% for 2023.
"We now need to focus as much on profit growth as we have on margins," CEO Dominic Blakmore told analysts.
Rival Sodexo last month flagged slow new business wins for its on-site services division.