Greggs still rising despite cost pressures

Baker Greggs (GRG) delivered a resilient annual performance despite continuing cost inflation pressures weighing down profit growth.

While in line with previous guidance, total sales growth of almost a quarter and an 18 per cent uplift in like-for-like sales at company-managed shops were a reminder of the strength of Greggs’ brand and pricing power. There was some volume growth here, which Shore Capital analysts referred to as “commendable”.

But this didn’t result in a jump in profits. Higher wages, energy, and food and packaging costs hit the bottom line, with annual cost inflation coming in at 9 per cent. The reintroduction of business rates also hurt. Despite the Bank of England expecting inflation to come down rapidly this year, management forecasts 9-10 per cent cost inflation in 2023.  

The company will stick to its expansion plans, however. The board is targeting 150 new stores (net) this year after a record 186 new sites were opened in 2022 (147 in net terms). 

Greggs also revealed that Nigel Mills, former chair of corporate broking at Citi and a current director at Wood Group (WG.) and Persimmon (PSN), has been appointed to the board. Such experience will come in handy as the company makes progress towards its five-year target of doubling sales.

The consensus target price among City brokers is over £30, suggesting that there are gains to be made for investors. While the valuation may look demanding at 22 times forward earnings, this is still well below the five-year average of 28 times. And headway on evening sales, as well as the expansion plans, keeps us keen. Buy.

Last IC View: Buy, 2,438p, 5 Jan 2023