ii view: Greggs – improving trend but uncertain outlook

Shares for this food-on-the-go chain have almost halved in 2020. Buy, sell or hold?

Third-quarter trading update to 26 September

• Sales averaging at 71.2% of 2019 levels

ii round-up:

Bakery chain Greggs (LSE:GRG) today reported improving September sales after a tough August, but remained cautious on the outlook given rising Covid-19 cases. 

The Newcastle headquartered company also warned of potential job losses given the soon-to-end job retention scheme and its attempt to balance employment costs against expected ongoing lower customer trade. 

Greggs shares fell by 8% in UK trading having nearly halved year-to-date. Shares for fellow food retailers Tesco (LSE:TSCO), Sainsbury (LSE:SBRY) and Morrison's (LSE:MRW) are all down by around 15% in 2020. Shares of delivery and robot warehouse company Ocado (LSE:OCDO) have more than doubled. 

September sales for Greggs averaged 76.1% of their 2019 level. Sales for the quarter since reopening in early July had averaged 71.2% of 2019 levels. It suffered a tough August given that its eat-in areas had remained closed and, as such, it had not proved eligible for the government’s Eat Out to Help Out scheme. 

One hundred of its larger shops have now reopened their customer seating areas with social distancing measures in place. Better demand in September had allowed it to bring back more of its product range, including a broader sandwich range and classic favourites such as Belgian buns. All of its manufacturing operations have now reopened.

Consultation on proposals to reduce employment costs are currently underway. First-half results to the end of June and covering store closures under lockdown saw it reporting a loss of £65.2 million. Accompanying management outlook comments pointed to uncertainty, given rising Covid cases and increasing risks of supply chain interruption and further possible restrictions on customer activities. 

ii view:

Greggs runs just over 2,000 stores across the UK. The company was founded 80 years ago by John Gregg to delivery fresh eggs and yeast to customers in Newcastle. Its transformation from bakery to food-on-the-go began in 2013. Products are now made in centralised plants and delivered via its own logistics. Its store outlets are located across a variety of locations including high streets and industrial parks. A delivery service in partnership with Just Eat is being trialled. 

For investors, rising Covid cases, localised lockdowns and the potential for nationwide restrictions on consumers to be tightened cannot be overlooked. The suspension of the dividend payment during the pandemic uncertainty also removes a key shareholder attraction. But the group’s value proposition in increasing difficult economic circumstances are unlikely to be forgotten by consumers, while it remains well managed. In all, despite current outlook uncertainty, its medium to longer term growth record should, at least for now, offer something for patient shareholders. 

Positives: 

• Returned to a positive net cash position in September
• Pursuing digital initiatives such as click & collect & home delivery 

Negatives:

• Cautious outlook given Covid-19
• Dividend payment suspended

The average rating of stock market analysts:

Buy