ii view: Greggs sales are strong but costs a worry

Expanding its store numbers, growing its App use and providing a value product offering. Buy, sell, or hold?

Fourth-quarter trading update to 1 January

• Same store or like-for-like sales up 18.2%
• Full-year total sales up 23% to £1.51 billion
• Full year profit guidance left unchanged

Chief executive Roisin Currie said:

"We enter 2023 in a strong financial position that will enable us to invest in shops and supply chain capacity to bring Greggs to even more customers across the UK.  While market conditions in 2023 will remain challenging, our value-for-money offer of freshly-prepared food and drink is highly relevant as consumers look to manage their budgets without compromising on quality and taste."

ii round-up:

Bakery and food outlet operator Greggs (LSE:GRG) today detailed sales which beat City forecasts, although it expects cost pressures through the year ahead. 

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Like-for-like same store sales rose 18.2% during the final quarter, pushing total full-year sales up by close to a quarter to £1.51 billion, ahead of analyst forecasts for £1.47 billion. 

Shares in the FTSE 250 company were little changed in UK trading, but are up significantly since September. However, they are still down by more than a quarter over the last year. That compares to a decline of just under a fifth for the FTSE 250 index, similar to Tesco (LSE:TSCO).

Greggs' fourth quarter sales were aided by both soft comparatives given the pandemic hit to the end of 2021 and demand for its festive bake and mince pies. 

Relatively new early evening trading for some 500 of its stores also played its part, with growth in the use of its App to enable click and collect and deliveries also assisting.

Net new store openings of 147 outlets during 2022 leave its total store portfolio at 2,328. 

Broker UBS summarised the Q4 performance as ‘robust’, reiterating its ‘buy’ stance on the shares following the update. 

ii view:

The Newcastle headquartered company began a transformation from bakery to food-on-the-go retailer back in 2013. It is now a leading player in the UK takeaway sandwich and savouries market, predominantly making its own products in centralised bakeries. Digital technology is now central in its strategy, with a reward offer, click and collect, and home delivery service partnered with Just Eat Takeaway.com NV (LSE:JET).

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For investors, elevated costs such as those for food ingredients and energy are expected to continue pressuring profits through 2023. The economic outlook for its customers remains highly uncertain, too, potentially pressuring spending, while management’s focus on investing in its shop estate and supply chain capacity may hinder potential for special shareholder returns near term. 

More favourably, the opening of new stores is ongoing, a focus on cost control continues, its digital push is ongoing and its value proposition at a time of economic challenge should mean it's favoured by cost conscious consumers. 

Positives: 

• Value product offering
• Opening new stores 

Negatives:

• Elevated costs
• Uncertainty economic outlook

The average rating of stock market analysts:

Buy