Greggs makes progress but warns on 2022 profits

Greggs (GRG) is making headway towards its goal of doubling revenue over the next five years, but more immediate pressures are causing the baker a headache. Despite sales climbing by more than a half and the confirmation of a £41mn special dividend, the market was spooked by cost inflation hitting the 2022 outlook and the shares plunged by almost 9 per cent.

January’s trading update meant that there were few other surprises in these results. The profit posting – helped by £15mn of business rates relief which won’t be repeated this year – were in line with expectations, as was sales growth. While total sales were up by 5.3 per cent against the pre-pandemic 2019 posting, two-year like-for-like (LFL) sales in company-managed shops were down by 3.3 per cent. The special dividend had been trailed, although the confirmed amount comes in at the high-end and is backed by robust cash generation in the year which saw the year-end cash balance soar by £162mn.

The bad news came in the current trading statement. While LFL sales for the first nine weeks of the year performed well, up by 3.7 per cent against 2020, chief executive Roger Whiteside advised that higher costs for ingredients, energy and employees would hit profits this year.

“Cost pressures are currently more significant than our initial expectations,” he said. Given this, “we do not currently expect material profit progression in the year ahead”. Greggs isn’t, of course, the only retailer being battered by cost inflation but a stymieing of profit growth isn’t what the market wanted to hear.

This doesn’t obscure the progress that is being made towards ambitious growth plans. Greggs can boast of 2,181 shops, with 103 net openings in the year and plans to hit 3,000 units. The evening trade market is being further taken advantage of, with plans to extend late shop opening to 500 units this year. Digital and delivery channels are also being boosted.

Peel Hunt analysts forecast sales of £1.28bn and adjusted EPS of 117p for 2022, and then £1.36bn and 115p for 2023. The broker said that “it is clear that the future is relatively bright” when it comes to growth opportunities.

Greggs remains an attractive long-term proposition, with solid fundamentals and ambitious yet achievable growth targets. Current share volatility offers investors a chance to buy in at a relative low point. The shares are trading at a consensus 19 times forward earnings, significantly below the five-year average. Buy.

Last IC view: Buy, 2,628p, 27 Jan 2022