ii view: sales recovery at Greggs triggers share surge

Covid has hurt but net cash is held and new stores are still being opened. 

Fourth-quarter trading update to 2 January

• Same store sales averaged 81.1% of the 2019 level
• Total sales down 15% to £293 million
• Net cash position of £37 million

Chief executive Roger Whiteside said:

"Whilst the impact of Covid-19 has been enormous, we have established working practices that allow us to provide takeaway food services under the different levels of restrictions we have experienced.  The breadth of Greggs' customer base provides ongoing demand for our services which, combined with our diverse geographical spread, has demonstrated the resilience of our business."

ii round-up:

Bakery chain Greggs (LSE:GRG) today reported an improving sales trend as it continued to push its delivery sales with partner Just Eat (LSE:JET). 

Fourth-quarter same store sales averaged 81.1% of the 2019 comparative, up from 71.2% in the prior third quarter. Group net cash of £37 million also surprised to the upside, beating estimates nearer to £10 million.

Greggs shares rose by more than 9% in UK trading, leaving them down by just under a fifth over the last year. Shares for home delivery company Ocado (LSE:OCDO) are up over 80% during the last year, while shares for supermarket group’s Tesco (LSE:TSCO) and Morrison's (LSE:MRW) are both down around 5%. 

Greggs' delivery sales in the quarter totalled 5.5% of its company-managed shop sales compared to 2.6% in the early weeks of September. Sales through partnering retailer Iceland, where it sells its products for home baking, also contributed.  

However, management does not expect profits to return to pre-Covid levels until 2022 at the earliest. It currently expects to report a pre-tax loss of £15 million for the full year 2020 compared to a profit of £108 million in 2019.  

During 2020 Greggs opened 84 new shops including 35 franchised outlets and closed 56. Expanding its estate to 2,078 shops. It expects to open around 100 net new stores in the year ahead.

Just over 800 staff redundancies were made over 2020 as the company moved to reduce costs under pandemic hit sales. Full-year 2020 results are scheduled for 16 March.

ii view:

Greggs 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 bakeries and delivered via its own logistics. Its 2,000-plus outlets are located across a variety of locations including high streets and industrial parks. Just over 300 stores are franchised shops operated by partners. 

For investors, management expectations for profits not to return to pre-Covid levels until 2022 at the earliest cannot be overlooked. The suspension of the dividend payment under pandemic uncertainty also removes a key shareholder attraction. But the company remains well managed and its value proposition in tough economic times is a favourite of cash-strapped consumers. In all, and despite ongoing Covid uncertainty, a solid track record of growth should continue to offer long-term investor reassurance.

Positives: 

• Net cash position held
• Pursuing digital initiatives such as home delivery and click & collect 

Negatives:

• Expected full year 2020 pre-tax loss
• Dividend payment suspended

The average rating of stock market analysts:

Buy