Greggs evolves to match post-pandemic trends

Greggs (GRG) has delivered a steady-as-she-goes report at the half-year mark, which might come as a relief to shareholders after the disruptions to normal trading since April 2020. The high street bakery group registered like-for-like (LFL) sales growth of 22.4 per cent on the first half of 2021. More tellingly, company managed outlets delivered a 12.3 per cent LFL improvement on the same period in 2019, although customer footfall is still short of the pre-pandemic level.

In June, the chain opened its 400th franchised outlet, but the growth of its estate is being guided by altered consumer behaviour in the wake of the pandemic. It has evolved to become less focused on traditional shopping areas in favour of its in-store café concept, together with forecourt and drive-thru sites. Recent openings do include outlets at London’s Leicester Square and Liverpool Street Stations, but management notes that large city centres have been slower to recover from the impact of the lockdowns.

Reported profits lagged revenue growth, with the gross profit margin down by 160 basis points to 62.5 per cent. That’s healthy enough, and it was to be expected that earnings for the period were constrained by the reintroduction of business rates, an increase in VAT and higher levels of cost inflation. Unsurprisingly, it’s that last element that poses a threat to profitability. To mitigate the impact of prices rises, Greggs has passed a portion of the increase on to customers, and it has also arranged fixed input prices for food, packaging and energy “for an average of around five months”. Management estimates that the overall level of cost inflation in 2022 will be around 9 per cent, but it admits that it’s an uncertain situation.

Despite the company's travails during the pandemic, the shares remain well supported at 18 times forecast earnings, but the share price is still 30 per cent down on the consensus target. Buy.

Last IC View: Buy, 2,080p, 8 Mar 2022