The City certainly doesn’t know what to make of Premier Foods plc at the moment.

After the UK food manufacturer’s shares took a pounding last year (falling by over 70% amid weak results, a dispute with a major customer, concerns over debt and a change in leadership), the stock is up by more than 14% so far in 2012.

Progress under new CEO Michael Clarke has cheered the market. More businesses have been sold off, costs have been cut and a sense of focus has been brought to Premier. When the Sharwood’s sauces owner announced its first-half results in Tuesday (7 August), its shares rose. However, yesterday, Premier’s shares fell back as the market digested the numbers and, despite some early signs of progress, the challenges that lie ahead.

Premier reported success in cutting costs quicker than expected and posted an increase in underlying half-year sales and profits.

Clarke said a “significant investment” in marketing had boosted the performance of Premier’s power brands, which include Ambrosia custard, Sharwood’s sauces and Batchelors soups.

The Premier chief said the company’s power brands were “taking share from our competition”. He said: “We have consistently grown value share. This is the first time we have seen share growth across our power brands for in excess of 18 months. In a tough consumer environment, our actions are delivering and we’re taking share from the competition consistently.”

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In all, reflecting on Premier’s performance, Clarke said the company had become a more financially sustainable business.

However, while sections of the City welcomed parts of Premier’s results, questions remain for Clarke and his team. He sought to answer one key question: how much the improved performance of Premier’s grocery brands was simply thanks to the company being able to win back the shelf space it lost last year after its dispute with Tesco.

Clarke insisted Premier’s power brands had gained share without yet regaining the shelf space it had lost. “We’re still in the process of rebuilding that availability following those delistings. What’s pleasing is we’re hitting these growth rates and gaining share and there still is the opportunity to still rebuild the availability,” he said.

Investec analyst Martin Deboo agreed he could see signs of recovery from the company’s grocery business. “The Tesco dispute erupted in Q2 last year. The superficial impression is therefore of a soft comp effect in Q2/H1. But the reality is that the impact didn’t really make itself felt until H2,” Deboo wrote in a note to clients.

“Aside from the natural soft comp effect, Premier shared data from reputable market analysts IRI that suggested that they have grown share in Power Brand categories in 17 out of the most recent 18 weeks. We think the most recent ten weeks or so have benefited from the soft comp of the Tesco dispute. But the numbers also reflect bread, where share is flat. So we detect what looks like a genuine turnaround in Premier’s grocery portfolio.”

Shore Capital analyst Darren Shirley insists the dispute with Tesco needs to be taken into account when considering the performance of Premier’s grocery brands in the first half of the year. “It was a relatively weak comp. They were still trading against a period when they were actually delisted. Whether there was actually underlying share gains or whether they gained a bit more shelf space remains to be seen,” he said.

While the City debates the underlying performance of Premier’s grocery business, there is widespread concern over the outlook for its bread arm. Profits from the company’s bread division fell 27%, a notable drop given the business accounts for over 40% of group trading profit. Clarke tried to take some positives, pointing to Premier’s performance when compared to its competitors. “The pleasing thing is while the market is down 2.7% in volume terms, we’re very pleased that we’ve been able to hold share on a value basis,” he said.

However, with the cost of wheat set to climb after the extreme weather seen this summer in the US and the UK, Clarke faced questions from analysts about how Premier would deal with a stiffer commodity bill. “Clearly what’s happened in the wheat market is an exceptional circumstance given the drought in the United States and the wet weather here in the UK. All the signs are that it is going to result in an exceptional increase in the cost of wheat which we will pass on,” Clarke insisted.

Nevertheless, passing on those price increases will not prove that straight-forward, analysts argue. “Premier think that analysts over-obsess on wheat prices. No wonder when it represents circa GBP150m (US$234.9m) of annual cost excluding milling,” Deboo said. “We think wheat prices are going up and Premier will need a price increase in H2. With that comes risk.”

The UK bread market is renowned for being one of the most challenging in the grocery sector. Last month, Associated British Foods, the owner of the Kingsmill brand, said the category was “intensely competitive” and said promotional activity had hit margins.

That said, Shirley suggested Premier could be at a disadvantage to ABF and its other main UK bread rival, Warburtons. With bread representing a smaller portion of ABF’s business than Premier’s, Shirley said the Kingsmill firm “can afford to be more tactical on volumes”. Privately-owned Warburtons can take a “longer-term” stance.

Cost cuts could be a way of battling the challenges facing Premier’s bread business. Clarke said Premier believed it could reduce “manufacturing controllable costs” from bread by 4%, as it has done with its wider grocery business.

“We know we’ll be able to get there in the bread business and you’ll see some of that coming through in the back half of the year and continue into 2013,” Clarke said. “Quite a few structural changes in our business on the bread side and as and when is appropriate we’ll make those announcements.”

There is, then, plenty to ponder for Premier even as it points to signs its focus and investment on selected brands is paying off. More disposals are set for the next year or so but, as they offload more assets, bread becomes all the more important to the business.