ii view: cold response to Greggs Q3 numbers

Third-quarter trading update to 28 September

• Company managed like-for-like sales up 5%
• Total sales up 10.6%

Guidance:

• Now expects cost inflation for 2024 to be towards the lower end of its previous 4% to 5% estimate

ii round-up:

Food-on-the-go-retailer Greggs (LSE:GRG) today detailed cooling sales growth but maintained its expectations for the full year 2024.

Same store, or like-for-like (LFL) sales at its managed and not franchised outlets rose 5% in the third quarter to late September. That’s down from growth of 7.4% in the first half of the year to late June. 

Shares in the FTSE 250 company fell as much as 6% in UK trading having come into this latest news up 20% year-to-date. WH Smith (LSE:SMWH) is up 11% over that time and the FTSE 250 index up almost 8% in 2024. 

• Invest with ii: What is a Managed ISA? | Open a Managed ISA | Transfer an ISA

Selling an all-day breakfast baguette and recently introducing a new pumpkin spiced doughnut, Greggs currently trades across 2,016 company-managed shops and 543 franchised outlets across the UK. 

Total sales for the quarter, and including a net 86 new store openings, climbed 10.6%, with Greggs on track to open a net new 140-160 stores in 2024. 

Year-to-date total sales are up 12.7%, with LFL sales up 6.5%, supported by menu development and more progress in extending trading hours and new digital channels.

Driven by increased forward buying, the retailer now expects the overall level of cost inflation for the full year to be towards the lower end of its previously highlighted 4-5% forecast range.

A further trading update is scheduled for 9 January. 

ii view:

Greggs began a transformation from bakery to food-on-the-go in 2013. Today, its products are now predominantly made in centralised bakeries. Group strategy includes growing its store portfolio over time to a potential 3,000 UK stores, increasing its digital related sales such as click & collect and delivery via Just Eat and investing in supply chain production and logistics.  

For investors, the difficult economic backdrop including higher borrowing costs for its customers cannot not be ignored. Costs pressures such as those for electricity persist, other food-on-the-go companies such as McDonald's Corp (NYSE:MCD) are not standing still, while the group’s geographical exposure is limited just to the UK.  

• The UK shares to own as interest rates fall
• ii view: Next set on expanding overseas empire
• Why the City loves M&S and Sainsbury’s shares

On the upside, Greggs has implemented growth initiatives including expanding its store numbers and improving its logistics. Costs such as food ingredients have eased. A focus on product categories such as iced drinks and pizza is being aided by both extended opening hours and digital initiatives, while a forecast dividend yield of around 2.2% is not to be forgotten. 

In all, and while the challenging economic backdrop offers headwinds, the retailer’s focus on product value should guarantee it remains a favourite with hard-pressed UK consumers.

Positives: 

• Value product offering
• Several growth initiatives 

Negatives:

• Tough economic backdrop
• Lacks geographical diversity

The average rating of stock market analysts:

Buy