Can the Greggs share price keep rising?

Can the Greggs share price keep rising?
The baker’s shares are looking expensive but that might be for a reason.
Dan Lane
August 3, 2021

Greggs is back.

That’s the message the bakery chain was keen to get over in its half-year results today.

And it’s hard to argue with the numbers. Total sales for the period came in at £546.2m against £300.6m last year. 

And even accounting for the madness of 2020 and a lockdown-induced hit to trade, today’s sales figures are still level with the £546.3m achieved in 2019.

Underlying pre-tax profits of £55.5m were well above the £64.5m loss this time last year and the £40.7m raked in over the first six months of 2019.

And if there was any doubt the chain was aiming for a full return to normality, news of another vegan product launch will put that to bed.

Just in time for us all to start getting back out there, Greggs is set to offer a new vegan sausage, bean and 'CheeZe' melt in more than 2,000 shops across the UK.

Are Greggs shares worth buying?

Given how resilient the outfit has been it’s no surprise to see profit guidance upgraded this morning. But getting back to winning ways this quickly has clearly been a nice bonus for chief exec Roger Whiteside. 

He had previously said it would be next year, at least, before the company could get back to 2019’s levels. It’s difficult to argue the chain isn’t already there with figures like this morning’s.

But, digging into how it got there shows the journey back to normality could still be incredibly bumpy.

First quarter sales were 21.5% lower than 2019 due to store closures but, as soon as we were allowed to get back into the world in Q2, sales exceeded expectations and rose by 2.8%. There might have been fewer customers overall but they were buying more to make up for it.

Quite the change but one the stock market had largely priced in, in the run up to today’s announcement.

Past performance is not a reliable indicator of future returns.

Despite shops in public transport hubs and large city centres continuing to drag down the overall recovery, suburban and high street bakeries have led the charge. This is the part of the portfolio that sets Greggs apart from city-focused rivals like Pret A Manger, which don’t have the same spread across the UK.

In fact, the strongest locations for Greggs have been those typically accessed by car like its motorway pit-stop shops, many of which are run as franchises.

Is a bet on Greggs a bet on the UK recovery?

And it’s a part of the business Whiteside has every intention of ramping up. “Making Greggs accessible to more customers on-the-go” is a strategy the firm has decided holds “significant potential for further expansion”. 

70% of new shop openings in the first half of the year were accessible by car including roadsides, petrol stations, retail parks and supermarkets. 

The firm expects to have around 100 new bakeries opened by the end of the year, of which around half are anticipated to be with franchise partners.

It’s not a bad strategy to follow if the company thinks doubling down on the best performing element of its portfolio in Q2 still has room to boost the bottom line.

But investors backing Greggs might just be inadvertently backing a broader UK economic recovery.

As a nation we racked up more household savings than ever last year but they’re savings we never wanted. We just couldn’t get out to spend and when we are fully able to again, it’s the incidental purchases those extra pounds in our pockets will find. 

It’s unlikely Greggs will be our night-out destination but we might pop in along the way to work, the same way we’ll grab a bottle of water from WHSmith at the airport. With the new vegan cheesy bean bake on offer, we might just have more reason than usual.

With a Greggs on most motorways by now, as well as in town centres and more suburban parts of the UK, if they get back to normal business, chances are that’s because we’re all back out there too.

Is Greggs a buy or sell?

For investors, the positivity in today’s update has been priced in over the past few months. 

Shares are quite highly valued with a price-to-earnings ratio of around 27 but being able to pump profits back into the business and grow it at the rate Greggs can, will be more than worth paying up for in many shareholders’ eyes.

We’re forever harping on about the importance of being able to use profits to generate even higher levels of return for a company. In more normal times Greggs has a return on capital employed (ROCE) figure above 20%, well above the 10% long-term average for the wider market.

If that side of things can stick around, investors might be ready to stay with Greggs. That will depend on how efficient the firm is in rolling out its new locations and how quickly they can start producing profits of their own.

Past performance is not a reliable indicator of future returns.

Source: FE, as at 2 Aug 2021. Basis: bid-bid in local currency terms with income reinvested.

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