Greggs makes progress despite share price wobble

Investors responded to Greggs (GRG) results as if they had just bitten into a scalding hot pasty. The sausage roll seller’s shares were marked down by more than 7 per cent after the release of these results, which seems odd on the face of it given solid revenue and profit growth. Perhaps, as several City analysts mused, the lack of an earnings upgrade on the back of the interim postings weighed on sentiment as management kept its full-year forecasts unchanged.

The underlying performance was certainly encouraging, if expected. Like-for-like sales rose by 16 per cent in the first half. Progress was made with the expansion of evening trading, which grew its contribution of company-managed shop sales from 6.5 per cent last year to 8.3 per cent this time. And Greggs is on track to open a net 150 new stores this year, with diversification offered through new locations at airports and underground stations. The board remains bullish on the potential for over 3,000 shops across the UK.

While cost inflation remains a concern, especially when it comes to wages, management highlighted that food and packaging commodity costs are “expected to ease somewhat” as the year progresses. However, cost pressures did weigh on margins here, with the underlying net profit margin before tax falling by 50-basis points to 7.5 per cent.

A mean target price amongst brokers of 3,177p, according to the consensus position on FactSet, suggests that there is significant upside available for investors. The share price fall offers a cheaper entry point into a company which is gaining market share and making strategic progress, with a consensus rating of 22 times forward earnings representing a 25 per cent discount to the 5-year average. Buy.

Last IC view: Buy, 2,728p, 07 Mar 2023