Greggs targets expansion

Value baker Greggs was an unexpected beneficiary of the rise of social networking this Christmas after a Facebook campaign helped sales of its 'festive bake' climb 23 per cent to 2m. The group also sold 1m mince pies in the four weeks to 26 December, a 6 per cent improvement on a year earlier.

But even a 4.4 per cent like-for-like sales increase in Christmas week itself wasn't enough to make up for a fairly subdued year overall, in which underlying sales climbed a mere 0.8 per cent. Broker Shore Capital believes Greggs experienced slightly lower volumes in its second half, while the inclement weather in the first few weeks of 2010 has seen sales slip between 6 and 7 per cent.

The rate of new store openings also slowed in 2009 to a net 10 new shops, but Greggs said expansion would accelerate over the next two years and be funded from operating cash flow, which remains strong. Full-year EPS, to be reported on 18 March, will be in line with analysts' expectations of 31.6p.

EVOLUTION SECURITIES SAYS...

Buy. Short-term concern about adverse recent weather is legitimate, but does not undermine the strong, self-funded future growth story - we note the two bad weeks of snow in February last year. In time, the number of stores will expand from 1,400 to 2,000: this does not require further penetration in London and will include more airport sites, business/retail parks, garages, hospitals and universities, which will offset tough high-street trading conditions. We argue that the shares should re-rate higher to reflect the enhanced growth prospects - a multiple of 13 times 2010 earnings estimates is too low.

SHORE CAPITAL SAYS...

Buy. Greggs has had a challenging operational start to the year, but not one that we expect to distort overall progress. New stores should be serviced by a progressively modernised bakery network that should assist margins over time and we expect range developments in 2010, particularly in sweet lines, confectionary and breakfast lines. This is important, as with inflation at its lowest for five years, like-for-like sales growth will have to be volume or mix dependent. Management also stated that it expects a reasonably stable cost environment this year. Cash balances should be sustained throughout its £290m, five-year investment bulge.