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Trading at fair value – Shares have moved in lockstep with LFLs. We delve deeper into what the first 19 weeks’ print may reveal. While short-term trading may exceed expectations, medium-term headwinds persist. We reiterate our Hold recommendation with a target price of 1,900p.
Greggs plc
Greggs – A response to the doubtersWe sit down with Greggs' Chief Financial Officer, Richard Hutton, to address some concerns about recent developments in the Greggs story and explore whether we've reached 'Peak Greggs' (see link to our recent notes here). We discuss the softer trading environment, the strength of the evening trade proposition, and the viability of the store rollout and associated capex plans. Lastly, we seek reassurances from management on the flexibility of the balance sheet should trading deteriorate, as well as their perspective on why the long-term outlook may still be positive.
FY24 was a good year for Greggs as its long-term strategy to grow revenue, coupled with more favourable input cost inflation, provided better profit growth than in FY23. In common with many consumer companies, the environment has deteriorated through the back end of H224 and into the start of FY25.
Cutting FY25/26/27 PBT by 3% / 6.5% / 9% respectively Following Gregg’s FY24 results, we lower our FY25 adj. PBT estimate by c.3% to £192m, in-line with consensus, reflecting a higher net finance charge and marginally lower LFL assumptions. For FY26/27, we take bigger cuts of 6.5% and 9% respectively as we prudently assume a more modest improvement in LFL volumes and account for the new guidance for a c.80bps (c.£8m p.a.) gross opex headwind related to the new sites in Derby and Kettering. Overall, this results in c.1.5% PBT growth in FY25, c.+5% in FY26 and c.+7.5% in FY27. Move to HOLD given lack of visibility on profit growth over next 3 years Following the c.10% pull back yesterday, Greggs’ shares are now c.-32% ytd and, based on our updated numbers, now trade on 13.7x cal.25 P/E and 6.5x EV/EBITDA. While this is attractive vs. historic averages, the profit growth outlook for the next 3 years is now less clear given the challenging macro and the new guide on margin investment for mid-term growth. As a result, despite continuing to see strong mid-term growth potential, we move to HOLD (PT of £21) until we get more visibility on improved underlying LFL volume and profit momentum. Challenging macro unlikely to improve until H2 at the earliest Greggs highlighted a challenged trading backdrop in its conference call yesterday with LFLs +1.7% ytd as poor weather impacted January demand before recovering to c.+2.5% in February. This nonetheless means LFL volumes remain in negative territory - management does not expect that to improve until H2 when it begins to lap easier comps. The soft consumer backdrop is not helped by FY25 cost inflation of c.6%, and while the Group will look to drive cost efficiencies, the majority of this will be offset via price with c.4-5% already taken in late December.
What’s next – We believe Greggs is a good company, but the LFL momentum was key in underpinning its forecast momentum. This is under pressure, and we reduce our TP from 2,500p to 1,900p to reflect this. Hold.
FY24 PBT of £190m with FY25 outlook ‘unchanged’ despite tough macro Greggs reported its FY24 results this morning and, as guided in the January trading update, Group revenues came in at £2,014m with adj. PBT of £189.8m (+13.2% yoy), marginally ahead of consensus at £188m. Group adj. EPS was 137.5p, +11% yoy and again broadly in-line. Looking forward, company-managed LFL sales remain muted at just +1.7% ytd (implying -c.2-3% volumes and down from +2.5% in Q4) with poor weather in January impacting demand before a pick-up in February, back to in-line with the Q4 performance. Management notes a continued tough macro backdrop with significant inflation and cost-of-living pressures for consumers. Overall, management’s expectations for 2025 are unchanged and it remains confident in its ability to navigate the current challenging trading environment. In terms of estimates, we currently model FY25 £2.20bn sales (+3.8% shop LFL), 145 net new shops (140-150 guide unchanged), £198m adj. PBT (+5% yoy) and £1.44 adj. EPS. VA consensus has FY25 sales of £2.19bn (+3.4% co-managed shop LFL), £192.2m adj. PBT and £1.39 adj. EPS. Goodbody view Following the tough start to the year, Greggs shares currently trade on 14.5x cal.25 P/E and 6.5x EV/ EBTIDA. This represents a significant discount to its c.20x and c.9x historic averages though clearly reflects the uncertainty around earnings for FY25. We continue to see strong growth potential for Greggs over the mid-term though acknowledge shares are unlikely to recover until the market has visibility on improved / positive volume momentum. While there may be some relief that company expectations are unchanged, the continued muted LFL performance ytd means today’s update is unlikely to be a positive catalyst for shares. We are likely to nudge our FY25 estimates towards consensus accounting for modestly softer LFLs and a higher finance charge. Key FY24 highlights Highlights: i) Estate - 226 new shop openings in 2024 (145 net including 53 relocations) to 2,618 shops with 165 refurbishments also completed – 140-150 net openings planned for 2025 including 50 relocations. Capex of £300m in 2025 is expected vs. £249m in 2024 with a further £200m expected in 2026 before normalising to c.5% sales thereafter. ii) Growth initiatives: Evening trade now 9.0% sales (2023 8.5%), Greggs app now scanned in 20.1% of store transactions (2023 12.5%). Delivery now 6.7% of sales (2023 5.6%) with sales +30.9% yoy, now available at 1,556 stores. iii) Gross margins were +100bp to 61.7% with EBIT margin +20bp to 9.7% as Distribution & Selling Costs +50bp to 47.2% and Admin Expenses +30bp to 4.9%.
PBT is a touch ahead of expectations but the good news ends here. We believe volumes have deteriorated further since Q4 and progress in strategic initiatives (evening and delivery) look lack-lustre. Since downgrading to Sell (21st January), we acknowledge that outer-year consensus forecasts now reflect more realistic profit growth assumptions. However, we still believe consensus expectations for c. 3.5% LfL sales growth (for this year and the medium term) will be challenging, given 1) the current depressed LfL run rate against multi-year high sales growth and 2) our view that evening trading is not resonating with customers. For more details, see our report: Greggs: "A bit flaky..." (42 pages). We therefore leave our below consensus forecasts unchanged (which reflect C-M LfL growth of 2% this year) and would highlight that should LfLs turn negative in FY25 – a risk we see as plausible - cash preservation would come to the fore, given elevated capex plans.
FY24 results slightly ahead of consensus, with underlying PBT up 13.2% to £189.8m, 1.4% ahead of consensus PBT of £187.2m (Source Visible Alpha). Total sales grew 11.3% with company managed stores LFL sales up 5.5%. Gross margin improved 100bps, more than offsetting opex inflation, with EBIT margin + 20bps to 9.7%. A FY DPS of 69p (+11.3%) is proposed. Current trading impacted by a weak January. For the 1st 9 weeks of 1H, LFL sales in company managed stores grew 1.7%. Weather conditions were challenging in January with improving LFL momentum in February to c.2.5% (similar to Q4). Management’s 2025 expectations are unchanged, with profit growth expected as it is confident on managing inflationary headwinds. We cut FY25E/FY26E PBT by 2.9%/7.2%, reflecting phasing of higher fixed costs, mainly depreciation and ROU interest, as a result of its elevated 5year supply chain investment programme. Guidance is for a short term margin headwinds +40bps in FY26 & FY27, plus lower ROCE until utilisation builds. Our FY25E cut brings us in-line with consensus, with FY26E 6% below. Good momentum with strategic initiatives to develop the offer and improve access to Greggs across multiple channels. For example, Evening, the fastest growing daypart, is now 9% of company-managed shop sales (FY23 8.5%). Delivered is now in 1,556 stores (FY23 1,440) with sales accounting for 6.7% of company managed stores (FY23 5.6%). Greggs app is scanned in 20.1% of company-managed shop transactions (FY23 12.5%). The current valuation (CY25E PE 15.2x) does not reflect Greggs’ longer term growth potential, as brand access continues to improve via its store roll-out programme and daypart extension to evening and delivery. Reiterate BUY.
Weak Q4 backdrop to overshadow another good year of growth and strategic progress The Greggs share price is down 24% YTD, having reacted negatively to a weaker-than-expected January update, which saw Q4 sales slow more than expected and a weaker near-term outlook. A Q4 LFL slowdown was expected given tougher comps YoY as the business passed the Uber Eats launch anniversary, but weaker footfall added to the slowdown. Q4 company-managed shop LFL sales grew +2.5% (3Q +5% and 1H24 +7.4%), implying volume decline. In hindsight, the weaker backdrop started in summer, when consumer sentiment weakened, with September’s better performance misleading. Management has assumed negative 1H25 volumes. Analysts at the top end of the market expectation range trimmed FY25 growth expectations. The weak end to FY24 overshadows what was another good year of growth and strategic progress in broadening the range, opening a net 15 stores, growing the evening part and developing new channels such as delivery & digital. We forecast 10.3% growth in FY24 PBT to £185m (Visible Alpha consensus £187.2m). As already reported, total sales grew 11.3% to £2.014bn with company managed store LFL +5.5%. Cost growth was guided to come in towards the bottom end of its 4-5% guidance. FY24 year-end net cash of £125m has been reported, though there was a £27m timing benefit as the Kettering land purchase fell into FY25 rather than FY24. Management likes to keep a year-end net cash balance of £50m-60m and typically returns surplus cash above that, if there are no investment needs and depending on the outlook. Greggs has been maintaining a higher-than-normal cash position to support its multi-year supply chain investment plans. FY25 is another elevated year of capex and we expect Greggs to keep the cash since we forecast net cash to fall YoY in FY25E given guided capex plans. Focus is likely to be on trading YTD + cost mitigation progress Focus is likely to be on current trading and the outlook, particularly the cost inflation outlook, and whether anything has changed to suggest the 2H slowdown was anything more than a broader market issue. One is looking for management to reiterate its confidence on its cost mitigation strategy. Greggs already put through some price increases in December to help offset expected mid-single digit cost inflation with biggest drivers of this being labour (NI & NLW changes) and food (planned for 5-10%). The recent sell-off is a good buying opportunity for such a high-quality growth story. The shares trade on an undemanding CY26E PE of 13.8x. Concerns over cost inflation are overdone with Greggs past masters at mitigating cost inflation through selective price rises. We expect the FY24 results to reassure that growth continues, with good future new space opportunities, further strategic progress on evolving the proposition and that its supply chain investment plans to add further capacity are on track.
Research Reels: Consumer - Restaurants & Bars: Greggs - getting a bit flaky?Everyone loves Greggs!....Or so we all thought. Momentum seems to be cooling and we are not convinced the evening trade is resonating with customers. Yet if evening trading is struggling to gain traction, it is not obvious how store profitability can push on, to the levels some assume. Ben Hunt dives into the economics of evening trading and provides new insights. He concludes that Greggs has its work cut out for itself.
Greggs^ (GRG, Buy at 2,124p) - A medium-term opportunity - upgrade to BUY
We are not that convinced lack-lustre Q4 trading will reaccelerate any time soon following a period of ‘supernormal’ growth. Yet outer year consensus forecasts assume Greggs will continue to deliver consistent high-single-digit top line growth with stable EBIT margins. Greggs’ premium valuation appears supportive of such a view. We believe this puts the onus on strategic initiatives – specifically evening trading and delivery – to drive volume growth. Yet our analysis suggests underlying momentum in evening trading is waning and we query whether it is resonating with customers in a highly competitive market. Reflecting a more conservative top line growth outlook, we downgrade our PBT forecasts by c. -6% in FY25E (and -10% in FY26) taking us c. 5% below consensus. Given elevated capex, FCF is expected to be depressed this year. If LfLs were to fall to -2% this year, a dividend cut might be required to maintain the company’s preferred liquidity threshold. We move our TP to 1733p and recommendation to SELL.
Model update – lowering FY24/FY25 PBT by 1.2% and 6% respectively We update our model post Greggs’ Q4’24 trading update, lowering our top-of-the range FY24/25 PBT estimates by 1.2% and 6% respectively. For FY24, this brings us more in-line with consensus (£188m). For FY25, we now model +3.8% LFL sales with the weak Q4 trading conditions continuing into H1’24 before gradually recovering in H2 against softer comps. In addition, we model a 30bps EBITA margin decline to 9.6% as c.5% cost inflation is only partially offset by strong cost control and the benefit of a c.4.5% net-price increase. Coupled with continued estate rollout (FY25 145 net-new), this leads to c.5% PBT growth to £198.5m. Soft Q4’24 disappointing as organic growth levers fail to insulate Greggs’ managed LFLs were just +2.5% for Q4 implying underlying volumes fell -2.5% in the quarter. This reflected faltering consumer confidence, particularly post Budget, with softness in locations for more “discretionary” visits like high streets with sites closer to roadside, travel or work locations faring better. Greggs believes its Q4 performance mirrors that of the broader FTG sector with its share of the market unchanged, though clearly this implies its various organic growth drivers (evening daypart expansion, delivery, loyalty scheme / app) are not driving as much outperformance as seen so far post-COVID. Remain Buyers though near-term uncertainty creates an overhang After falling c.22% over the past two days and accounting for our new estimates, Greggs now trades on a 15.4x cal.25 P/E and 6.9x EV/EBITDA (vs. 19.6x and 8.8x historic avg). Given the uncertain near-term trading backdrop, we reduce our fair value multiple to historic averages which, combined with our DCF model, results in a new PT of £30.00. Despite the lack of visibility near-term, we view the sell-off as overdone and remain buyers given the strong mid-term growth potential.
Greggs has reported that FY24 profit is in line with management’s expectation despite the more challenging environment and slowing sales growth through H224. The more challenging market means that management is more cautious about the outlook for H125 than previously. With space expansion and recovery of cost inflation, it expects to deliver profit growth in FY25 albeit lower than previously anticipated. We have reduced our FY25 profit before tax estimate by c 2%.
Momentum slows – The market will be concerned with the slowing LFL, and with Greggs trading at a premium to the sector, we see pressure on its shares. We reduce our TP from 2,900p to 2,500p. Reiterate Hold.
Reflecting subdued High Street footfall, Q4 LfLs at 2.5% was below our expectations. Still, momentum appears to be fading here and we suspect volumes turned negative in Q4. Cost savings mean no changes to forecasts for this year and reassuringly management is confident it can mitigate higher employment costs going forward. That said, consensus expectations for ‘mid-single digit LfL company-managed sales growth in FY25 may prove stretching and the onus is now on evening trade and delivery to drive volume. The valuation is by no means undemanding on 19.7x FY26 PE and it is hard to see any immediate catalysts for consensus upgrades. HOLD.
Greggs^ (GRG, Hold at 2,626p) - Q4 trading softer than expected
Softer trading into Q4’24, though FY PBT in-line with expectation Greggs provided a year-end trading update this morning in which it reported LFL sales growth of 5.5% for FY24 (GBY +6.5%) with Q4 LFLs slowing to just +2.5% (GBYe +6.2%) reflecting more subdued High Street footfall. Total sales in the period are expected to come in at £2,014m (+11.3% yoy, GBY £2,041m). In terms of outlook, despite the softer top-line performance, the Group had strong cost management in the quarter, and it consequently expects the FY24 PBT outcome to be in-line with previous expectations (GBY FY24 PBTe is £190.7m vs. VA consensus at £188m and a range of £163-173m). For 2025, Greggs remains confident in its ability to mitigate the well-flagged labour inflation headwind and anticipates another year of progress in the year ahead. Goodbody view Overall, while it is helpful to see FY PBT guidance reiterated, the slowing top-line momentum through Q4 is a concern and highlights a more challenging consumer backdrop currently in the UK. With the stock having sold off c.7% yesterday (cal.25 P/E 17.2x – 15% discount to historic average), there may be an element of travel-and-arrive into today’s update but we nonetheless expect a muted / negative share price reaction this morning. Given the softer top-line momentum we see low/mid-single-digit downside risks to FY25 numbers (GBYe PBT £211m). Key highlights Highlights from today’s statement include: i) LFL sales growth in Q4 was +2.5% reflecting a much softer market backdrop with lower consumer confidence impacting footfall. Greggs maintained share of visits; ii) The Group opened 226 new shops (during the period and closed 81 sites for total net-new store openings of 145 (GBY 150). The total estate comprised of 2,618 shops at year-end. The Group expects to add 140-150 net-new shops in FY25, including 50 relocations (GBY 150); and, iii) Greggs finished the year with a net cash of £125m (GBY £91m) which will support the Group’s investment requirement to drive future growth.
FY24 was another good year of progress with the full year profit outcome expected to in-line with the Board’s previous expectations. Therefore, we expect no change to company-compiled PBT consensus of £188m. The £2bn sales milestone was surpassed for the first time. FY24 total sales grew 11.3% to £2,014m. Company-managed LFL sales were +5.5% (INVe +5.5%). A record 226 stores were opened, or a net 145 new stores adjusting for closures/relocations, in-line with 140-160 guidance. A slower end to the year was expected, given tougher comps YoY as the business passed the Uber Eats launch anniversary. However, the Q4 slowdown was more pronounced than expected reflecting more subdued footfall generally. Q4 company-managed shop LFL sales grew 2.5% (3Q +5% and 1H24 +7.4%). In hindsight, the slowdown probably started in the summer, when consumer sentiment weakened, with September’s better performance misleading. Year-end net cash of £125m was better than expected (INVe £76m) with a £25m timing benefit from the Kettering land purchase falling into FY25 rather than FY24. Our cashflow forecast has been adjusted for this. Investment plans on track with another 140-150 net stores planned for FY25. Good progress was made on the planned supply chain developments. Derby’s lease (due to open in 2026) was signed in November. Kettering (due to open mid-2027) planning application was approved & land purchased. No change to FY24E/FY25E PBT forecast with further profit progression forecast in FY25E. Our FY25E PBT forecast of £197.4m (consensus £201.5m) is based on total sales up 7.6% with company-managed store LFL +3%... Continued overleaf
Greggs demonstrated continued strong sales growth in Q324, against a challenging Q323 comparative. The company continues to benefit from its multipronged growth strategy of increasing space, extended trading hours, new digital channels and menu development. Management is confident of meeting its full year expectations, helped by marginally lower cost inflation than previously expected.
We maintain our thesis that Greggs is a solid operator, but with an increasingly promotional fast-food environment, cost headwinds, and a store estate nearing capacity, see limited opportunity. Hold, TP 2,900p.
Greggs Solid Q3 delivery, no change to FY expectations / our forecasts Economic view Biggest ever budget package to be announced today
Solid Q3 performance, albeit slowing from the H1 performance Greggs provided a Q3 trading update this morning in which it reported company managed LFL sales growth of +5% (H1: +7.4%) and total sales growth of +12.7% (H1: +13.7%). For the year-to-date, LFL sales are +6.5% with total sales +12.7%. Growth in Q3 was underpinned by menu development, extension into the evening daypart and new digital channels, while its new iced drinks range continues to perform well with availability in 800 shops today and a total of 1,000 shops expected to offer the range by year-end. In addition, the Group notes that September was the strongest month of the quarter pointing to a better exit rate into Q4. The Group has opened 86 net new shops in the year date with the company’s guidance of 140-160 net new shops for the FY unchanged. Cost inflation to be at lower end of range, PBT expectations unchanged Looking forward, the Group now expects cost inflation for 2024 to be towards the lower end of the 4-5% guidance range. In terms of PBT guidance, it continues to expect a FY outcome in-line with previous expectations. We currently forecast Group FY24 revenues of £2,048m (+13% yoy) driven by LFL sales growth of 7% (consensus: +6.5%) and 150 net new store openings. This, combined with 75bps gross margin improvement underpins our PBT estimate of £191m which is c.14% growth yoy and sits c.2.5% above VA consensus estimates. Goodbody view Greggs shares are +22% ytd and the stock now trades on a cal.25 P/E of 20.4x and EV/EBITDA of 9.1x. Overall, we consider this to be another solid update from the company and retain our positive stance on the stock given its attractive long-term growth potential from new store openings and LFL sales drivers (Gregg’s app and loyalty scheme, expansion into the evening daypart) and robust delivery to date. In terms of forecasts, we are unlikely to material changes our estimates, albeit will nudge LFLs lower offset by higher margins due to lower cost inflation.
Greggs^ (GRG, Hold at 3,094p) - Q3 FY24 TS - Easing LFL momentum & costs, guidance maintained
Q3 trading update contains little new info or change in guidance. LFL sales +5% means the company needs to hit 4% LFL in Q4 to meet our FY assumption of +6% and deliver +12% FY sales growth. This is supported by new openings which remains on track and while the update is light on strategic initiatives such as dayparts, delivery channels etc we have no reason to believe these are also not on track. The shares have done well outperforming the FTSE 350 by c.16% YTD – deservedly so. We upgrade our PBT by 6% but move to a HOLD purely on valuation grounds and nudge our TP up to 3300p reflecting the better margin outturn.
Another solid quarter. For the 13 weeks to 28th September, Q3 total sales were up 10.6% (1H +13.8%) with company-managed store LFLs up 5% (1H+7.4%). This was mostly price with volumes flat YoY. The LFL exit rate was higher with September the strongest month of the quarter, helped by menu development and further progress in extending trading hours and digital. YTD total sales were up 12.7%, with CM LFL +6.5%. No change to the Board’s FY24 expectations with company-compiled consensus FY24 PBT of £186m unlikely to move materially. Comps get tougher as Greggs passes the anniversary of the Uber delivery launch around now. Management still expects to open a net 140-160 net stores in 2004 (net 86 opened YTD) and now guides to overall cost inflation towards the lower end of the 4%-5% range previously guided. Supply chain investment on track. The Birmingham distribution centre redevelopment and Amesbury extension have been completed, adding capacity for c300 additional stores in the Southern region. Construction of a new frozen product manufacturing and logistics facility in Derby is progressing as expected, with the lease due to be signed in Q4 and the facility fully open in 2026. Planning application has been submitted for Kettering, a new chilled and ambient NDC, which is due to open in 2027. Upgrade FY24E/FY25E PBT by 1.3%/1.5%, driven by higher sales and lower costs assumptions, moving us to just below consensus. This conservatively implies 11% sales growth and 6.3% PBT growth in 2H. With material cost headwinds continuing to lessen, Greggs’ longer-term growth potential and valuation appear underpinned by new space opportunities, proposition development and moving into new channels. Reiterate BUY.
Greggs^ (GRG, Hold at 3,114p) - Upgrading forecasts - FY25F PER >21x
Greggs’ H124 results demonstrate the ongoing benefits of its multiple levers to drive revenue growth as well as a pleasant surprise on operating margin. With a relatively normal environment for input cost inflation, management is optimistic about the outlook for the year. We have marginally increased our profit estimates, which has also fed through to an increase in our valuation.
Upgrading, but still below consensus – Greggs’ 1H performance was solid, but a high PE ratio (>20x) and concerns around the store estate nearing its peak underpin our Hold recommendation. TP increased to 2,900p.
Resilient but expensive. Greggs had a solid 1H24, but at >20x PE we see better value plays elsewhere in the sector. We reiterate Hold, TP 2,700p.
Strong H1 performance with PBT marginally ahead of expectations Greggs reported H1 results this morning with Group revenues of £960m (+13.7% yoy) driven by LFL revenue growth of 7.4% (GBY +7%) and 51 net new store openings during the period. Underlying PBT came in at £74.1m (+16.3% yoy, GBY £73.3m) as the strong top-line momentum was supported by 60bps gross margin improvement as the Group better recovered cost inflation in the period. This is c.1% ahead of our estimate and c.2.5% ahead of consensus. Momentum set to continue; FY expectations unchanged Looking forward, the Group’s cost outlook is unchanged (+4-5% yoy) and its expectations for the FY are unchanged. In terms of estate rollout, it remains confident in delivering 140-160 net new stores in the period. With regards to supply chain development, it remains on track for the redevelopment of two new distributions to come on stream in H2’24 and has announced this morning that it has exchanged contracts for a new 25-acre plot in Kettering where it will build a new National Distribution to come onstream in H1’27. VA consensus is looking for FY24 Group revenues of £2,020m (+11.6% yoy), adj PBT of £187.9m (+12% yoy) and Group adj. EPS of £1.36 (+9.8% yoy). Our current FY24 estimates are for Group revenues of £2,030m, PBT of £190.9m and Group EPS of £1.38. Goodbody view Greggs shares are +15% leaving it trading on a cal.25 P/E of 19x and EV/EBITDA of 8.7x. While this is relatively full on a near-term basis, we continue to see significant growth potential over the mid-term with several key drivers, as evidenced by today’s update. This underpins our continued positive stance on the stock. Following today’s update, we are unlikely to move our estimates though would not be surprised to see consensus nudge higher.
Greggs^ (GRG, Hold at 2,936p) - Still strong, guidance maintained, scope for upgrades...
First half revenues and LFL sales are tracking very modestly ahead of expectations and with no change to the cost outlook, confidence in FY numbers is high. Driving sales has been the store opening programme, strong LFL driven by the numerous self-help levers as well as gains in market share. Investment in the supply chain is on time, in budget and as expected. We expect no change to numbers. Greggs has consistently hit strong ROCE >20% and this ties in with the investment mantra and LTIPs scheme. The shares have done well outperforming the FTSE All-share by 4% the last 6-months but we note the valuation and we are nearing the point where upgrades are needed to drive the shares further
H1 FY24 PBT was £74.1m, +16% YoY, (LY: £63.7m) reflecting solid LfL sales growth and some gross margin recovery of c.+ 60bps YoY. Net cash was £141.5m (LY: £139m) buoyed by a one-off working capital inflow which will reverse in H2. An interim dividend of 19p has been declared. H1 CM LfLs were up 7.4%, in line with trading reported in May (for the first 19 weeks) with growth supported by menu development across all dayparts and channels. Greggs App participation has accelerated meaningfully to 18.3% of CM shop transactions (H1 FY23: 10.6%, H2 FY23:14%) which implies App transactions have doubled YoY. In turn, this should drive higher customer purchase frequency (via the new Greggs loyalty scheme). Elsewhere, Greggs opened 51 net new stores in the period, such that management is confident of reaching between 140 – 160 net openings this year. In the meantime, evening daypart trading continues to advance with sales growing ahead of the average LFL rate. Supply chain investment: Redevelopment of Birmingham and extension of Amesbury distribution centres remains on track to complete in H2, while Derby is progressing well and will be operational in late 2026. Contracts have now been exchanged for the purchase of land in Kettering, on which the new national distribution centre - providing automated upstream picking of chilled and ambient goods - will be built, to be operational in H1 2027. Outlook & forecasts: The cost inflation outlook remains unchanged with management expecting LfL costs to increase between 4% - 5%; this implies LfL costs tick up marginally in H2 given H1 LfL costs were +4%. Even so, we nudge up our forecasts by c. 2%; which conservatively implies just 4% YoY PBT growth in H2 and LfL sales growth of c. 5%.
FY outlook unlikely to change based on robust top-line Greggs report H1 results on 30 July in which we expect continued robust top-line momentum (both new stores and LFL) and a broadly unchanged FY24 outlook, albeit with more detail on the P&L impact of: i) the onboarding of new leases associated with the significant capacity expansion plans; and ii) high capex levels in the outer years (D&A and opex). For FY24, we model +7% shop LFL sales to £2,030m, £191m adj PBT (+14% yoy) and £1.38 adj EPS (+11.6% yoy). H1 expectations Following +13.8% sales growth and +7.4% LFLS for the 19 weeks to 11 May, we expect Greggs to deliver H1 sales +13% yoy to £954m (+7.0% LFL). Benefitting from further pricing ytd in key SKUs (see page 3 from Goodbody Analytics), we expect gross margins +30bp yoy to 61.2%, driving EBIT +17% to £76.5m, adj PBT +15% to £73.3m and adj EPS +13% to 53p with higher tax and interest headwinds yoy. Following the recent Enfield site visit, we expect no changes to the FY outlook for 4-5% LFL cost inflation, 140-160 net shop openings and c.£250-280m FY capex supporting the multi-year expansion of its distribution network. Valued for long-term growth potential Greggs trades on 20.7x/18.7x 2024/25 P/E and 9.2x/8.5x EV/EBITDA – while these are full on a headline basis, they reflect the long-term, top-line led upside from new store openings and LFL sales drivers (i.e. delivery, evenings, App – see charts on page 3). While the current elevated capex / network expansion agenda out to FY27 creates some uncertainty around profit delivery and returns dilution in the near term, it will future-proof the business and allow it to efficiently expand to its c.3.5k UK shop potential over time (from 2.5k in May 2024).
Forecasts held – Despite its successful growth post Covid, we are wary of the remaining white space opportunity. The valuation is relatively high at 22x PE, and we stick to our bottom-of-the-range view for FY24-26E, expecting profit growth to taper in FY28E. We reiterate Hold, TP 2,700p.
Site visit to manufacturing and distribution operations in Enfield Enfield serves as one of Greggs’ three ‘combined’ dedicated logistics and production centres. Prior to the previous supply chain transformation programme, the manufacturing site operated multiple production lines. Today, the site specialises in just Pizza – a growth category – and bread rolls. The pizza line has 23 rows (versus 12 for the sausage roll line, at Balliol) and produces >1m pizza slices a week (versus 6.5m sausage rolls a week, at Balliol). It operates with 60-70% utilisation across two shifts per 24 hours. Meanwhile, Enfield’s Radial Distribution Centre (“RDC”) serves 509 stores in the South and East of England and is thus working close to full capacity (c. 550 stores). The site handles 30 deliveries a day to its store network across 250 SKUs (of which c. 50% are ambient, with the remainder split between chilled and frozen). Currently, the picking operation for stores is done manually on site. The rise of Primary logistics: Derby and Corby/Kettering The opening of two new primary logistics centres, at Derby and Corby/Kettering, should be transformational for the Group – enabling more logistics capacity and additional manufacturing, whilst also creating further supply chain efficiencies given semi-automation capabilities. For example, at Enfield, by moving picking (using semi-automation) upstream, significant space would be freed up. Indeed, as much as 75% of the inventory within Enfield’s frozen picking area could be removed and replaced with space for crossdocking. The additional liberated space would ultimately allow Enfield’s RDC to distribute to an extra 100 stores (in addition to LfL sales growth in existing stores). On this basis, the two new sites will effectively add the equivalent of 4 new RDCs (to the Group), albeit with a more efficient cost base given less reliance on increasingly expensive labour. Whether it will further reduce supply chain opex (as a % of sales) – currently now as low as c. 14% (vs 19% in FY13) – remains to be seen. As per the recent trading update, the two new sites are expected to be operational in late 2026/early 2027 with operations overseen by Swisslog. Whilst operational risks exist, management is confident that, having implemented a similar supply chain format to serve its Irish store network, risks can be contained. It notes that a number of other food retailers run similar logistics operations, from which Greggs has taken learnings.
Greggs’ trading update for the first 19 weeks of the year shows that the company is driving superior revenue growth from its key initiatives of growing space, delivery and evening sales and leveraging the app along with its continuous menu enhancements, despite what has continued to be a challenging backdrop for consumers. The strong revenue growth on top of a tough comparative from the prior year includes both volume and price growth, which compares very well versus many other consumer-facing companies.
The shares have traded well recently and the valuation is full, reflecting the strong earnings growth visibility here. They may take a step back short term as there is no upgrade here, but fundamentally they are fairly valued in our view: good company, high multiple. Reiterate Hold.
Greggs^ (GRG, Hold at 2,818p) - Q1 FY24 – Easing LFL sales in more normalised times
The strong start to the year announced at the time of the prelims (March’24) has continued and LFL’s are +7.4% for the first 19 weeks of 2024. New site openings and relocations are bang on track and investment in the supply chain is on time, in budget and as expected. With no change to the cost outlook, guidance remains unchanged and no change to numbers. Greggs has consistently hit strong ROCE >20% and this ties in with the investment mantra and LTIPs scheme. Initiatives to drive LFL growth should continue to leverage the existing asset and cost base more efficiently, driving continued strong top-line and margin expansion.
Greggs (GRG) has issued a trading update where full year expectations have been maintained. LFL sales for the first 19 weeks are up 7.4% compared to the 8.2% disclosed for the first nine weeks of 2024 (volume growth is still positive). GRG continues to make progress against strategic aims, which we highlight in more detail below. We maintain our BUY recommendation and target price of 3,150p. Cost expectations/pricing – There has been no change to cost expectations for FY24E. Overall cost inflation is expected to be mid-single digit (4-5%), with wage inflation (biggest cost for GRG) being c.10% (in line with the rise in the national minimum wage). The expectation is still for one price increase in the summer. Strategic aims – There continues to be good progress against GRG’s strategic aims. GRG is still planning to open 140 to 160 stores in FY24. Delivery sales, the evening trade and increased participation in the Greggs App have all contributed to transaction volume growth. We expect percentage disclosures e.g. transactions scanning the app, to come with the HY results. We continue to believe GRG will be able to operate significantly more than 3,000 shops in the UK in time (current estate is 2,500 shops). Capex – At the FY23 results presentation, GRG set out revised capex guidance. This spend included capex on a 4th savory production line at Balliol Park, spend on two regional distribution centres (Birmingham and Amesbury) and investment in two Midlands sites (Derby and Kettering/Corby). There has been no change in capex expectations. Gaining market share – In 2021, we assumed that GRG’s market share of the total-food-to-go sector was c.6%. We continue to assume that GRG is gaining market share and believe GRG can double its market share from c.6% in 2021 by 2026/2027. Forecasts – We make no changes to our forecasts. We continue to assume that GRG will be able to achieve revenue of c.£2.4bn in FY26E.
Momentum has been solid, with LfLs up +7.4% for the first 19 weeks. Therefore, with LfLs at +8.2% for the first 9 weeks of the trading period, we estimate that growth moderated to a touch below 7% for the remaining 10 weeks of the period (to 11th May). We understand LfLs have, again, been driven by a combination of delivery sales, evening trade (which remains the fastest growing day part), and increased participation in the Greggs App. Strong start to store openings this year with 64 new shops opened in the period, which included 15 with franchise partners. We note that four company-managed shops were with Tesco and three with Sainsbury’s. The pipeline for the remainder of the year is said to be ‘strong’ - with further opportunities with supermarket groups. Supply chain development: Meanwhile investment projects at the Birmingham and Amesbury distribution centres are running to plan and the fourth production line at Balliol Park has now been commissioned. As previously communicated, management has now entered into a lease agreement on a site at Derby - which will increase manufacturing capacity needs and support logistics network capacity - while negotiations on the purchase of land in the Corby/Kettering area are also progressing well. These latter initiatives will become operational in 2026/27. Forecasts and outlook: Cost inflation expectations remain unchanged, with management expecting LfL costs to increase by c. 4-5% We leave our forecasts unchanged; these assume LfL growth of +5% this year, implying LfLs need only average c.+3.5% for the remainder of the year. We therefore expect 7% PBT growth in FY24E, driven by a combination of store openings and LfL sales growth from the development of new channels - see our note: Opening up to new growth (37 pages).
The second full year of Greggs’ five-year growth plan to double revenue by FY26 should be marked down as very successful, especially so given the challenging external environment. Unlike many consumer-facing companies, high selling price inflation was accompanied by volume growth, leading to good market share gains. The consumer is responding well to new initiatives to grow revenue in new dayparts and digital channels. Profitability was well-managed with better recovery of input cost inflation than FY22. We look for more of the same in FY24, which will be a significant year from a capital investment perspective, and beyond.
FY23 in-line, solid start to FY24
Greggs continues to deliver on its growth plans. Greggs is a solid performer, but at c.21x PE, we see better value elsewhere. For now we reiterate our 2,500p TP and Hold recommendation.
FY23 delivered much stronger cash generation, and this has underpinned the declaration of a special dividend. All other numbers have come in line with expectations and with no change to guidance, we leave numbers unchanged. Shares have rightly been resilient in the run-up to these results, and we see these gains being maintained. We see the continuation of the key investment thesis: Investment plans are all self-funded from strong cash generation. The focus on strong ROCE >20% links in with the investment mantra and LTIPs scheme. Initiatives to drive LFL growth should leverage the existing asset and cost base more efficiently, driving continued strong top-line and margin expansion.
Greggs (GRG) has issued FY results in line with the previous trading statement. Given the strength of the balance sheet, GRG has announced a special dividend of 40p per share. Post period end, LFL sales up 8.2% for the first nine weeks of FY24 (with volume growth being positive). GRG continues to make progress against strategic aims, which we highlight in more detail below. We maintain our BUY recommendation, cutting our target price slightly to 3,150p (previously 3,300p). Cost expectations/pricing – There has been no change to cost expectations for FY24E. Overall cost inflation is expected to be mid-single digit (4-5%), with wage inflation (biggest cost for GRG) being c.10% (in line with the rise in the national minimum wage). Whilst GRG implemented a price increase between Christmas and New year to offset inflation in wages, we expect one more price increase in the summer. Strategic aims – There continues to be good progress against GRG’s strategic aims. GRG plans to open 140 to 160 number of stores in FY24. The evening daypart continues to be the strongest growing daypart, with this contributing 8.7% of company managed sales. The number of company managed shop transactions scanning the app is 12.5%. We continued to believe GRG will be able to operate significantly more than 3,000 shops in the UK in time (current estate is 2,473 shops). Gaining market share – GRG has been gaining market share with the total share of food-to-go visits up to 8.2% (up from 7.7% in 2022). In 2021 we assumed that GRG’s market share of the total-food-to-go sector was c.6%. We continue to assume that GRG is gaining market share and believe GRG can double its market share from c.6% in 2021 by 2026/2027. Forecasts – We increase our revenue forecasts for FY24E and FY25E by 1% to reflect the stronger trading made by GRG. We cut our adjusted PBT in FY24E by 2% and in FY25E by 4% to reflect additional depreciation charges given the level of capex spend by GRG. We continue to assume that GRG will be able to achieve revenue of c.£2.4bn in FY26E. Valuation – We maintain our valuation methodology. We apply a 20.3x PE multiple (in to our FY25E adjusted EPS to get a revised target price of 3,150p (previously 3,300p).
FY23 PBT was a touch ahead of our expectations at £167.7m (+13% YoY) implying H2 PBT was +12.8% YoY (H1: +14.2% YoY). H2 EBIT margins were -62bps YoY (H1: -75bps YoY) as cost inflation impacted all areas of the P&L. As pre-reported, full-year total sales were +19.6% YoY, with company-managed (“C-M”) store LFLs of +13.7% YoY. Pre-reported net cash is £195m, reflecting the settlement of two insurance claims and rephasing of tax payments. A 40p special dividend has also been declared. Strategic progress: Market share has progressed over the year and is at an all-time high. Evening trade (sales post-4pm) continues to progress and was 8.7% of C-M shop sales during H2 (Q3 FY23: 8.8%, H2 FY22: 7.4%) implying YoY H2 growth of c. +40%. In the meantime, Greggs App participation in Q4 is now as high as 15% of C-M transactions (versus Q3 FY23: 13.2%, H1 FY23: 10.6%). On this basis Q4 App transactions have likely doubled YoY. We continue to argue that Greggs App customers are highly valuable – see aforementioned research note. Elsewhere, Uber Eats is now available in 930 shops, meaning a total of 1,440 shops offer a delivery service (across both Just Eat and Uber Eats). Delivery sales are therefore up 23.6% YoY. Supply chain: A fourth production line has been installed at Balliol Park, which will provide additional manufacturing capacity, while extra logistics capacity is being expanded at the Birmingham and Amesbury distribution centres. Two new state-of-the-art facilities are also planned, with one site secured in Derby and second site planned for the Kettering/Corby area. Outlook: For the first 9 weeks of the year, LfLs are +8.2% YoY (InvE FY24E: +5%) while overall cost inflation is still expected to range between 4-5%. 80% of energy requirements are now fixed for the year (50% in FY25) and management has 4 months of forward cover on food and packaging costs.
Meeting Notes - Jan 24 2024
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Greggs is the undisputed UK food-to-go specialist with a c8% market share of a highly fragmented market. Its track record is impressive, reporting 10yr CAGR store growth of 3.4%, revenue of 7.5% and PBT of 11.3%. In 2021 management set out to double revenue from £1.2bn to £2.4bn by 2026 (c.14% CAGR
Greggs ended FY23 in a strong manner and this has led to minor tweaks to our numbers. But we see a much higher cash generation and net cash balance, and this changes the investment thesis. FCF funds all capex in 2024 and some of the dividends, but as we move through the capex high point (FY23-25) the low cash point is now £130m and not the £50m we previously expected. What our model does not reflect (and nor does consensus) is momentum from evening trading and deliveries which could now lead to positive earnings momentum now that inflation is receding. We upgrade our TP to reflect our forecasts moving one year out, the stronger cash position and note momentum could provide further positive surprises. TP now 3100p from 2800p.
Greggs (GRG) enjoyed a stronger-than-expected end to FY23 with sales ahead of our estimates and consensus forecasts, enabling GRG to meet its profit expectations for the year. GRG’s strong revenue growth and an improved profit performance in FY23 means it has fared better than many other consumer-facing names during the year. With lower inflationary pressures, the company enters FY24 in a better place with respect to its selling price versus cost inflation than at the start of FY23, when it was still playing catch-up to the prior and ongoing rapid increases in input costs.
Valuation – The shares have bounced this morning, as the 4Q revenue beat provides a strong LFL run rate into FY24. Greggs has performed well and is a solid company, but at a c.20x PE, we see better opportunities elsewhere in the sector. We reiterate our Hold rating, TP 2,500p.
Greggs^ (GRG, Hold at 2,474p) - Strong trade, profit guidance maintained – a nudge higher to PBT
Greggs (GRG) has issued a Q4 update with LFL sales up 9.4% (majority of which driven by price). GRG anticipates the full year outcome to be in line with previous expectations (we were slightly ahead of market expectations). We expect to hear more on strategic aims i.e. evening trade as a percentage of company-managed sales and transactions scanning the app at the FY Results in March. We maintain our BUY recommendation and target price of 3,300p. Cost expectations/pricing: The outlook statement highlights that inflationary cost pressures are reducing with good forward cover on food, packaging and energy. Going forward we expect FY24E cost inflation to be mid-single digit, with wage inflation (biggest cost for GRG) being c.10% (in line with the rise in the national minimum wage). We note that GRG implemented a price increase on its products between Christmas and New Year to offset the inflation in wages. Consumer backdrop: We are cautiously optimistic on the UK consumer with consumer confidence increasing (as per GFK), headline inflation falling (CPI standing at 3.9% for November) and positive trends in consumer disposal income (as per the Monthly Asda Income Tracker). Gaining market share: We note recent data per Hospitality Data Insights which suggests that GRG is gaining market share (almost £2 of every £100 spent in UK hospitality is going to Greggs - up from previous figure of £1.60). We assumed that GRG market share of the total-food-to-go sector was c.6% in 2021. We believe GRG can double its market share from this by 2026/2027. Forecasts: We bring our FY23E forecasts in line with the trading statement i.e. revenue of £1,809m, PBT of £166m (current market consensus) and net cash of £195m. We make no changes to our FY24E and FY25E forecasts. Valuation: We maintain our valuation methodology. We apply the medium-term average 2-year forward PE multiple of 20.3x to our FY25E adjusted EPS to get a target price of 3,300p.
Greggs has come out with a very strong update delivering LFLs of +9.4% vs a comparative of 18% LY. Store openings are ahead of expectations and while the P&L is in line with expectations, cash generation has massively beaten our expectations with net cash of £195 at year-end vs. our £130m expectation. We recently moved to BUY due to some modest share price weakness towards the back end of last year and after this update, and with inflation now receding and opening expected to ramp up further, a BUY is the right call. Seems like all the strategic initiative shave contributed to such a strong performance.
Q4 LfLs were slightly ahead of our expectations at +9.4% YoY (INVe: +7% YoY) with continued growth in transaction numbers, albeit slowing since Q3, following a reduced contribution from price inflation – worth c. 4ppts – as well as Q3 this year benefitting from easier comparatives following the impact of the Queen’s funeral last year – worth 1ppt. LfLs were Q1: +16.5% YoY, Q2: +15% YoY, Q3: +14.2% YoY. We note on a 2YoY basis that LfLs in fact accelerated across quarters to 27% 2YoY, versus 24% 2YoY in Q3. Extended trading hours, digital and delivery: Evening trade (sales post-4pm) remains the fastest growing area of sales with Pizza performing strongly while delivery sales are benefitting from the recent additional partnership with Uber Eats platform – now in 710 shops. Greggs App participation also continues to progress, as high as 13.1% (of transactions) at Q3. Record store openings and strong pipeline: A record 220 new stores were opened during the year (Q3: 50, H1: 94) – implying 76 openings in Q4 alone, while planned investment into the supply for additional manufacturing and logistics capacity is progressing well. As such, year-end net cash was £195m (INVe: £138.5m) which will further support future growth, with management expecting to open a net 140 to 160 stores next year. Outlook and forecasts: We nudge up our PBT forecasts by 1.5%, following the slightly better than expected finish to the year. Next year, with good forward cover on food input costs and energy, we expect last year’s inflationary pressure to moderate despite elevated labour costs. We therefore expect a combination of sales from new store openings and modest LfL sales growth (+5% YoY) to drive c. 9% PBT growth.
Greggs continues to generate premium sales growth through a combination of volume, including market share gains as distribution increases, and price growth. The strength of underlying trading in Q323 is highlighted by management’s confirmation of consensus FY23 PBT expectations despite the addition of new costs for expanding the company’s delivery offer to a second platform and a slight delay in some store openings from the end of the year into FY24.
The shares have been fairly sideways in their recent trajectory, and we do not believe today’s statement will change that much. The shares have their attractions but 20x this year’s PE is rich enough for our blood. We reiterate our Hold rating and 2,500p target price.
Greggs^ (GRG, Hold at 2,478p) - Strong Q3 FY24 trading with in-line guidance
Greggs has continued to trade strongly in 3Q’23 with LFL sales +14.2% yoy. Store openings are progressing well with 82 net stores opened YTD against a 140 full year target. Management notes some easing of cost inflation as expected (LFL guidance for 2023 is c.+9%) and full year expectations are unchanged. Menu expansion continues to drive sales in evening dayparts, which remains a significant opportunity. The shares have had a relatively weaker run recently, down c.15% from the peak in May’23 (still +6% YTD and +45% LTM), but are still reasonable fully valued at 18.3x 12m forward PE multiple and 8.5x 12m forward EV/EBITDA. We remain HOLD on valuation grounds.
Greggs (GRG) has issued a strong Q3 update with LFL sales up 14.2%. Progress has been made against strategic aims, with c.135-145 net shop openings expected for FY23, the evening trade representing 8.8% of company-managed shop sales and 13.1% of company-managed shop transactions scanning the app. Whilst there is some easing in cost pressures, full year expectations have been maintained. We maintain our BUY recommendation and target price of 3,300p.
Momentum has been sustained in Q3 with LfLs up +14.2% YoY (Q1: +16.5% YoY, Q2: +15% YoY). Total sales are up 20.8% YoY. Market share gains have been driven by increased customer visits, reflecting the ongoing development of evening trading and digital channels via the Greggs App. Evening trade (sales post-4pm) continued to progress, at 8.8% of company-managed shop sales (Q3 FY22: c.7%, H1 FY23: 8.3%) implying annual growth of over >40% YoY, on our estimates. Greggs App participation has also stepped up, to 13.1% (of company-managed shop transactions) versus 10.6% at H1 FY23 and 6.5% at Q3 FY22, and we continue to argue that Greggs App customers are highly valuable - see aforementioned research note. In the meantime, following a successful trial, the Delivery service is now rolling out with a second delivery partner, Uber Eats. Management expects to have around 500 shops live by the end of October 2023, with further expansion to come in 2024. On track for a net 135 to 145 shop openings this year and circa 40 relocations. The pipeline for new openings remains strong for FY24 and we believe new openings remain ‘ROCE enhancing’, providing customers with more convenient access to Greggs, whilst relocations increase capacity for existing catchments. Investment in the supply chain is progressing well and capex this year will be around £200m. Outlook & forecasts: As expected, the rate of cost inflation has eased going into H2 and management has good forward cover in energy costs over the winter. Whilst we nudge up our revenue forecasts, we leave our PBT forecasts unchanged. We now assume H2 LfLs of +10.5% YoY, implying LfLs slow to c.+7% YoY in Q4, given tougher comparatives. Our LfL forecasts for next year remain conservative at just 5% YoY growth.
We believe the market overreacted to the previous HY in line results, with positive commentary around growing revenue and cost pressures abating. Whilst no upgrade was provided back in August, we believe an upgrade to forecasts will come through in October with the Q3 update. We increase our target price to 3,300p (previously 3,200p), maintaining our BUY recommendation.
Recent acceleration in evening daypart sales is reassuring – we estimate these were up >50% YoY in H1 FY23. Thus, we believe the Greggs proposition and offer is proving to be increasingly capable of competing against more established evening daypart operators. With evening daypart trading seemingly benefitting all parts of afternoon and evening trading, we think marginal gross profits (and revenues) are likely to far exceed marginal operating costs when store opening hours are extended. Evening daypart trading could drive contribution up by 40% to 60%, per store (for company-managed stores at maturity), we estimate – assuming varying levels of post-3pm sales productivity. As such, a successful roll-out across both existing and new stores could theoretically drive EBIT as high as £294m to £328m by FY26 – giving management plenty of excess margin to reinvest. The acceleration of Greggs’ App participation to 10.6% (LY: 5.2%) should drive purchase frequency while also driving click & collect participation – leading to AOV upside and improving customer economics. We estimate that App customers who engage in Greggs Rewards could be 3x more valuable than walk-in customers who forego using the Greggs loyalty scheme. Runway for growth looks secure, with few signs of cannibalisation or teething issues since management accelerated the pace of store openings. New stores continue to be ‘return enhancing’ for the overall group. Management therefore remains confident in its store opening pipeline and believes capacity levels can be increased without creating significant erosion of return on capital. Forecasts & valuation well underpinned, with current trading momentum showing few signs of slowing and the cost outlook improving. There may even be potential for upgrades later in the year if trading holds up and/or the cost outlook further improves. Given the potential for upgrades in both near and outer years we believe our target price of 4000p is well supported, given valuations achieved by other QSR international operators.
UK FOOD & BEVERAGE - Subway
Greggs plc Subway Finance & Investment Co Ltd
Greggs’ H123 results showed continued strong revenue growth, indicating good progress across the majority of its multi-year initiatives to drive revenue growth. Profitability continued to be hampered by input cost inflation as well as investment in the cost base to drive the expected revenue growth. A more favourable outlook for underlying cost inflation in FY23 than previously should be welcomed. We have slightly increased our estimates to reflect the strong growth in H123 and higher interest rates on cash deposits.
A solid business that is valued fairly – Greggs has continued to trade in line with expectations, but we feel the market was looking for an upgrade off the back of a promising 1Q. The shares trade at >20x PE, at a premium to the sector, so we maintain our Hold rating and 2500p TP.
Greggs^ (GRG, Hold at 2,762p) - Strong H1 FY23 results - premium rated, outlook unchanged
Greggs (GRG) has delivered a strong trading update. LFL sales are up 16% for the 26 weeks to 1 July 2023. Whilst no breakdown has been provided, we assume volume growth is still positive. Overall cost inflation for FY23 is expected to be nearer 9% vs the previous guidance of between 9-10%. GRG has continued to make progress against its strategic aims. We note the board’s expectations for FY23 are unchanged. We maintain our BUY recommendation and target price of 3,200p.
H1 FY23 PBT was £63.7m, +14% YoY, (LY: £55.8m) reflecting strong LfL sales growth, albeit offset by higher levels of cost inflation - gross margins were down c.150bps YoY. Net cash was £139m (LY: £146m) while an interim dividend of 16p has been declared. H1 company-manged LfLs were up 16% YoY, supported by a strong start to the year, in January and February, when sales comparatives were soft - reflecting the impact of Omicron last year while Q2 trading normalised, albeit still with strong LfL sales growth at c.15% YoY – with modest volume growth. Greggs App participation has accelerated meaningfully to 10.6% of company-managed shop transactions (LY: 5.2%) which should in turn drive higher customer purchase frequency (via the new Greggs loyalty scheme). Elsewhere, Greggs opened 94 new stores in the period, and, while the number of closures (44) had an unusual bias towards H1, management remains confident of reaching its target for 150 net openings. In the meantime, evening daypart trading continues to advance and remains the fastest growing daypart, with post-4pm sales now representing 8.3% of sales (LY:6.5%). Supply chain investment: management has commenced the redevelopment of the Birmingham distribution centre while the extension of Amesbury distribution centre is due to start in the second half. A fourth savoury production line at Balliol Park is due to be commissioned in the Q4, as expected. Outlook & current trading: Q2 momentum has continued into current trading while cost inflation is beginning to ease - with management expecting LfL costs to grow 7% YoY in H2, from 11% YoY in H1. Management now has four months’ forward purchasing cover on requirements for food, packaging and energy input costs. We leave our PBT forecasts unchanged which assumes LfL (and PBT) growth moderate to just c, 7% YoY in H2.
Greggs’ strong sales performance in the first 19 weeks of the year is in line with management’s expectations and therefore its profit expectations for the year are unchanged, as are our forecasts. Greggs continues to benefit from underlying volume growth despite the squeeze on household budgets and high industry-wide selling price inflation, which is testament to its ongoing product innovation and initiatives to drive growth. Our discounted cash flow (DCF)-based valuation of £30.50/share is unchanged.
Online Platforms, Greggs, Genus, Essentra, Caledonia Mining, Accrol Group, Mining LOWdown, SMID Market Highlights
GRG GNS ESNT CMCL ACRL IDS MARS OTB DEBS ESKNF
Greggs^ (GRG, Hold at 2,844p) - Strong trading, expectations unchanged
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GRG GNS ESNT CMCL ACRL LAND IDS MARS OTB DEBS ESKNF
Greggs has traded strongly the first 19 weeks of the year with LFL sales up 17%. This in part reflects the COVID impacted comparative and price rises to help offset inflation. LFL’s should start to normalise as we move thorugh the year. We are encouraged that the menu expansion continues to drive sales in evening dayparts and this remains a huge opportunity. However the shares have been strong rising c.30% the past six months. This is wholly deserved but means Greggs is now trading on an internatoinal QSR multiple and suggests to us that the shares are up withe events and upgrades are required to drive the shares higher in our humble opinion. The move to HOLD is purely on valuation grounds as this is a very high quality company.
Greggs (GRG) has delivered a strong trading update. LFL sales are up 17.1% for the first 19 weeks in 2023, with a couple of percent coming from a weak comparative period, low double digit from price inflation and the rest from volume growth. Overall cost inflation for FY23 is still expected to be 9-10%, driven by inflation in wages. GRG has continued to make progress against its strategic aims. We maintain our BUY recommendation and target price of 3,200p.
Momentum continues, with LfLs up +17.1%YoY for the first 19 weeks - in part reflecting the impact of Omicron in early FY22. Therefore, LfLs were +18.8%YoY for the first 9 weeks of the trading period, moderating to +15.7% YoY for the remaining 10-weeks of the period (to 13th May), with management expecting more normalised levels going forward, as actions taken against inflation in 2022 start to annualise. Menu development: Pleasingly, hot food and snacks (e.g., chicken goujons and wedges) are showing particularly strong growth while Pizza is also proving popular, driving sales in the evening daypart. Strong start to store openings this year with 63 new shops opened in the period, which included 25 with franchise partners. Recent shop openings have included sites at Canary Wharf Station and at Glasgow and Cardiff airports. Management believes the pipeline for new openings this year is strong. In the meantime, investment projects at Birmingham and Amesbury distribution centres are underway and will deliver additional logistics capacity for further shop openings in second half of 2024, as previously communicated. Outlook: Management’s outlook is confident, albeit mindful of the challenging economic environment. Cost inflation expectations remain unchanged with management expecting LfL costs to increase between 9% and 10% YoY although forward cover on key commodities is improving. We leave our forecasts unchanged. These assume LfL growth of +11% YoY this year, implying LfLs need only average c.+7.5% YoY for the remainder of the year. As such, we assume PBT growth of c.10% YoY this year, which is driven by a combination of store openings and LfL sales growth from the development of new channels (Evening day-part, Click & Collect, Delivery).
Greggs has entered the second full financial year of its five-year growth plan having exceeded our initial FY22 revenue estimates, helped by elevated external inflationary pressures, and with profit in line with management’s expectations. Despite the more challenging external environment, Greggs made good progress with the majority of its revenue growth initiatives in FY22. Following the expected normalisation of the cost base, which hampered profit growth in FY22, we forecast more consistent pre-tax profit growth in FY23–25 (three-year CAGR of 11%) relative to sales growth (12% CAGR).
Greggs has come out of the pandemic in a strong position benefiting from repurposing its supply chain to a food-to-go model. On top of this, the competition is weaker, the group is finding more availability of space and, by broadening the menu and dayparts and flexing its digital strategy, it is attracting more customers by giving more reasons to visit. The group’s strategy is a threat to other QSR players suggesting market share opportunities are large. With an aim to double sales over 5 years, this should deliver margin benefits which are not in our numbers. The shares are not the cheapest, but deserve their premium rating.
Greggs (GRG) has issued its FY results in line with expectations. Revenue was already communicated to the market and PBT is slightly ahead of market expectations. Most pleasing for us has been the progress GRG has made against its strategic aims, which we highlight in more detail below. With its appealing value-for-money offering and multiple growth drivers, we continue to believe GRG is well positioned to gain further market share (already at 7.7% of the food-to-go-market). We maintain our BUY recommendation and adjust our target price slightly to 3,200p (previously 3,170p).
We see nothing wrong at all with these numbers and the shares have done well. We consider 20x PE enough for the shares, so whilst we raise our target price from £20 to £25, we reiterate our Hold recommendation; we do not see the earnings momentum that would justify any higher.
FY22 PBT was a touch a head of our expectations at £148.3m (+1.9% YoY). This implies H2 PBT of £92.5m, +2.7% YoY (H1: +0.5% YoY), with H2 EBIT margins -207bps YoY (H1: -238bps YoY) driven by cost inflation. As pre-reported, full-year total sales were +23% YoY, with company-managed store LFLs of +17.8% YoY (Q1: +36.9% YoY, Q2: +11.2% YoY, Q3: +9.7% YoY, Q4: +18.2% YoY) with Q1’s performance buoyed by soft comparatives, following lockdown restrictions in 2021. Pre-reported net cash is £191m, reflecting phasing of capex investment. Strategic progress: The early-evening daypart (in 500 stores) remains the fastest growing daypart and management now plans to extend opening hours in 300 shops to 9pm, as well as trialling 24-hour drive-thru shops. Elsewhere, delivery volumes have been normalising to c. 5% of sales but management believes the longer-term opportunity remains intact - Click + Collect will be a key focus in 2023. The Greggs App is also helping Greggs to personalise its engagement with customers, which is seeing strong growth with 1.1m active customers in Q4 (LY: 0.4m) helping to drive brand health and market share. Supply chain: Mgmt will look to redevelop distribution centres in Birmingham and Amesbury in 2023 to add capacity to the network by the end of 2024. Further investment in the Midlands area will follow across 2024 to 2026, with a national distribution centre and a manufacturing and frozen storage facility. Outlook: For the first 9 weeks of the year, LfLs are +18.8% YoY - we estimate an acceleration on Q4 2022’s pre-pandemic run-rate. Overall, cost inflation this year is still expected to be between 9-10%, but visibility is improving with management securing forward cover for all electricity requirements up to the end of Q3, giving management the chance to benefit from lower prices should opportunities present themselves. Elsewhere, management also has forward purchased four and five months on food and packaging, respectively.
Greggs (GRG) is due to issue its FY results next week, where we assume GRG will be able to continue to offset market-wide cost pressures through strong top-line trading, price increases and cost efficiencies. With its appealing value-for-money offering and multiple growth drivers, we believe GRG is well positioned to gain further market share. We therefore maintain our BUY recommendation and target price of 3,170p (offering c.17% upside).
Greggs reported a strong acceleration in revenue growth in Q422 as revenue from new initiatives, digital and evening trading complemented anticipated space growth and underlying growth. Value leadership continues to support volume growth and the company’s ability to pass on inflationary cost pressures. As Greggs enters the second full year of its five-year strategy, FY23 profit growth is expected to improve as newer initiatives mature, and following the suppression of FY22 profit by internal investment, cost inflation and the return of some costs to the income statement post the initial COVID outbreak. We trim our FY23 and FY24 estimates by 3%, primarily due to higher-than-expected cost inflation.
Further comments following the Greggs and B&M conference calls . . . No operational gearing – Next will get the headlines but the pictures at Greggs and B&M, of course, very different business, actually sing a similar song to each other. Headline LFL was strong over the past few months (better than expected even given the easy Omicron comp), but it has not made much (any) difference to the bottom line. Greggs: Oct-Dec LFL was 18% with price being a key factor (there was another increase in October). Underlying cost inflation was 9% in FY22 (and it is expected to be 10% next year), so unless there is another exceptional period of LFL next year, much profit progress above what we have in mind already (c.5%) is unlikely. B&M: LFL double-digit in December: Clearly this was a happy Christmas from B&M in sales terms and both grocery and GM saw market share gains. It certainly sounds as though the inflation numbers seen at B&M were less than those seen in the wider market, so recent LFL numbers do imply some volume gains. However, there is no change to the bottom line and cost pressures are unlikely to relent. The market’s “meh” reaction to very strong LFL sales growth numbers is unsurprising given the lack of upgrades and how well the shares did in both of these companies in the run-up to the figures. Christmas clearly happened for both (and doubtless the whole sector), and that is to a degree a relief, but it will only be the very best companies that are able to grow sales to a level that brings real operational gearing given the probable high inflation in the cost base in the year ahead. Greggs and B&M are fine companies but the current share prices are there or thereabouts in terms of reflecting their prospects. HOLD x 2. Jonathan.Pritchard@peelhunt.com, John.Stevenson@peelhunt.com, Ruben.Pathmanathan@peelhunt.com
Greggs plc B&M European Value Retail SA
Greggs (GRG) has issued its Q4 trading update (quarter to 31 December), with LFL sales for this period up 18.2% (c.3% coming from a weak comparative period, low double digit coming from price inflation and the rest from volume growth). Total sales for FY22 were £1,513m and GRG has maintained its full year outcome i.e. flat PBT YoY. Whilst GRG does continue to see material cost inflation, we believe there is no change to the long-term investment case. We therefore maintain our BUY recommendation and target price of 3,170p.
Still too rich for our blood – the shares have had a good run into the statement and the attractions of the business are clear, with a growth profile and cash on the balance sheet. However, the shares trade on double the retail average and that is too high for our taste so we stick with a Hold rating and bring the TP up to 2000p.
Momentum accelerated in Q4 with LfLs up 17.8% YoY (Q1: +36.9% YoY, Q2: +11.2% YoY, Q3: +9.7% YoY) versus underlying trading in the latter 4 weeks of Q3 at c. +13% YoY. This performance was despite adverse weather and strikes - reflecting favourable trading, further price moves implemented in October, and softer comparatives last year when trading was disrupted by the Omicron Covid variant. For reference, two-year LfLs eased by c. 270bps between Q3 and Q4 last year. Early-evening (in 500 stores) remains the fastest growing daypart. There has also been strong growth in the use of the Greggs App, with consumers increasingly focused on value via the loyalty aspect. Seasonal lines were also in high demand throughout Q4. Year-end net cash was £191m versus our estimate of £174m, in part reflecting phasing of capex investment, albeit previously described. This will further support investment into growing the shop estate and supply chain capacity going forward. As such, management expect to open 150 net new stores again in 2023, having opened a net 147 in 2022. FY23E PBT forecasts unchanged (see overleaf). Management continues to expect material cost inflation (we assume costs increase c.10% in FY23E - broadly in line with FY22 cost inflation). However, visibility on costs is starting to improve given pay awards for staff have now been agreed and food input inflation is likely to ease as it annualises against high levels last year. Energy costs at c. 5% of sales continue to have the lowest visibility. Management has good cover up to Q1, but will face headwinds when hedges start to roll over. However, the recent fall in wholesale energy prices is reassuring. Despite cost headwinds, we continue to expect profit growth in FY23E with profits driven by cost recovery (from price moves), store openings and extended store opening hours.
Greggs (GRG) is due to issue a Q4 trading update this Thursday, where the focus will be on whether the company can maintain its guidance of flat PBT in FY22 vs FY21, despite the market-wide cost pressures (which we detail in this note). Given the price increases and cost efficiencies implemented throughout the year, we continue to assume GRG will be able to maintain FY guidance. We also continue to believe the long-term investment case remains intact. We therefore maintain our BUY recommendation, cutting our target price slightly to 3,170p (previously 3,270p).
Greggs’ impressive sales performance in Q322 enabled it to maintain its FY22 PBT guidance, despite the increasing pressures on consumer discretionary income and (maintained) input cost inflation. Growth is driven by momentum in its own initiatives, eg menu innovation and trading in new channels and dayparts, which is helping Greggs to gain market share. Our DCF-based valuation of £29.70/share is unchanged.
Good, but getting harder to be good Greggs’ 3Q update showed good LFL growth (11% adjusted, mostly inflation), and showcased a choppy few months. July was steady, Aug tricky and Sep better. Further down the P&L guidance is held: there is visibility on FY cost inflation (9%) and we think there will be some limited PBT progress. This may be a feature going forward: it is hard to see a dramatic growth profile suddenly emerging here. Indeed, with costs continuing to climb, it is feasible forecast momentum could turn negative. Greggs is a high quality company but there is no need to pay a mid-teens multiple for it in those circumstances. We reduce our TP to £18. Jonathan.Pritchard@peelhunt.com, Ruben.Pathmanathan@peelhunt.com, John.Stevenson@peelhunt.com
Momentum has been sustained in Q3 with LfLs up 9.7% YoY (Q1: +36.9%, Q2: +11.2%). Total sales are up 14.6% YoY. Growth moderated in August, given the strong “staycation” impact affecting performance last year, but pleasingly, momentum returned in September. Shops were also closed on 19th September for the funeral of Her Majesty The Queen, which management estimates impacted LfLs in the quarter by 1%. Taking this into consideration, underlying trading in the latter 4 weeks of the quarter was broadly in line with the first 4 weeks (+13.1% YoY) Store openings on track for a net 150 openings this year. To date, openings total 106 new shops and management expect 40% of openings this year to be with franchise partners. Openings in Q3 included two ‘drive thru’ sites, in Amesbury and Durham, and railway locations at Tottenham Hale and London’s Liverpool Street Station. Elsewhere, management will also be deferring £50m of capex – required to support capacity for its growth ambitions – from this year into next year. Outlook: Pleasingly, management now has an appropriate level of forward cover in key food and energy commodities to cover Q4 requirements and thus it continues to see LfL cost inflation held at c. 9% for this year. Management also has significant energy cover for Q1 FY23, with average costs expected to be below the level of the recently announced price cap. PBT forecasts unchanged: Despite rising cost pressures, we continue to expect PBT to be broadly flat this year, which assumes total sales growth of 9% YoY in H2, implying conservative growth for the remainder of the year. Our EPS forecasts increase c. 5% next year - owing to a lower assumed corporate tax rate - which nudges up our target price to 3845p. We believe that a combination of decent forward cover on food and energy commodities, support for consumers from the government’s energy price-cap and successful price moves should ensure that forecasts are well underpinned.
Greggs is high-quality, aspiring to considerable growth, effectively re-engineered with Roisin Currie now at the steering wheel. It offers a relevant assortment to folks on the go, retains very strong value credentials backed by a robust operating platform and balance sheet. There is a lot to like but, in this short update note, we argue that in the midst of a UK consumer recession the Group’s equity on c15 times (x) PER and c9x EV/EBITDA is fairly valued. HOLD.
Greggs’ (GRG) strong H122 results and trading to July demonstrate the resilience of its value-based product offering to customers in more challenging macroeconomic conditions and it is making good progress in generating incremental revenue from its new growth initiatives. Management’s reiteration of profit expectations for FY22 is welcome in the face of increasing input cost pressures. The near-term P/E multiple of 18.3x is only in line with its long-run average multiple despite the aspiration to grow revenue at a higher rate than it has delivered historically.
H1 FY22 PBT was £55.8m (LY: £55.5m) with flat profits reflecting the re-introduction of business rates (worth £15m), increase in VAT and higher levels of cost inflation. Net cash was £145.7m (LY: £118.3m) having paid a special dividend of 40p (worth £40.6m). An interim dividend of 15p has been declared. H1 LfLs were up 22.4% YoY (up 12.3% versus 2019) with Q1 LfLs up 36.9% YoY - flattered by comparison with restricted trading conditions in the same period last year - while Q2 trading momentum has been strong, aided by further price moves, with LfL sales +11.2% YoY - in line with trends reported in May and against more normalised comparatives last year. Store openings are comfortably on track for a net 150 openings this year while evening daypart trading is advancing. 300 shops now trade until at least 8pm (July 2021: 130). As such, management will extend trading hours in more shops during H2. In the meantime, the delivery service continues to prove incremental despite recovery of ‘walk-in’ trade, and delivery is now available in 1,180 stores versus 1,000 at the start of the year. New product development is being focused on healthier choices, hot food and evening daypart and there has also been strong growth in usage of the Greggs App - driving loyalty engagement and new services such as Click + Collect and product customisation - which management expects to extend to other elements of the made-in-store range. Outlook & current trading: In the last four weeks, momentum seen in Q2 has continued - with LfLs up 13.1%. However, mindful of market-wide cost pressures, management’s full year profit expectations remain unchanged, implying broadly flat profit growth in H2. We upgrade our sales growth forecasts by 7% this year - implying double digit growth in H2, but leave our PBT forecasts unchanged reflecting margin pressures. Separately, Matt Davies has been appointed as Chair Designate taking effect on 1st November.
Greggs’ (GRG) AGM trading update (first 19 weeks of FY22) indicates it continues to trade well in what has undoubtedly become a more challenging environment due to deteriorating consumer confidence. Management’s profit expectations for FY22 of no material profit progression are unchanged as it believes further selective price increases will be required to offset higher cost inflation than originally anticipated, which is likely to be the same for its competitors. The prospective P/E multiples have edged back towards the long-term average of 17.9x, which looks attractive given the forecast growth profile.
Greggs, the value-centric Tyneside based vertically integrated Food-to-Go ("F2G") retailer has issued its trading update for the 19-weeks to the 14th May 2022. Following this update we are placing our SELL stance on the Group's equity UNDER REVIEW.
Trading is in line, with LfLs up +27.4%YoY for the first 19 weeks, having been +44%YoY for the first 9 weeks, flattered by comparison with restricted trading conditions in the same period last year. In the subsequent 10-week period to 14th May, LfLs have averaged +15.8%YoY, with the exit rate approaching more normalised levels. As expected, trading in larger cities and in office locations continues to lag the performance of the rest of the estate, but transport locations have shown a marked increase in activity in recent weeks. Sales of hot food and snacks are showing particularly strong growth. Store openings are comfortably on track for a net 150 openings this year, with management having accelerated its store roll out programme - as outlined at its recent CMD. To date, openings total 49 new shops in the period, which included 18 with franchise partners. Openings include locations in a number of retail parks and new travel-based units at Birmingham and Liverpool airports. Outlook: While trading performance is in line and the pipeline for new store openings is strong, management remains mindful of market wide cost pressures, which have been increasing. By way of reference, at the Finals in March, management expected LfL costs to increase between 6% and 7% this year, while FY22 also loses the £15m benefit from business rates relief last year. Nevertheless, management has options to mitigate cost headwinds, from efficiencies and implementing price increases. We note that Q1’s price hikes have not been detrimental to demand and management remains comfortable with the overall competitive environment. Forecasts unchanged: Despite rising cost pressures we continue to expect PBT to be broadly flat this year, which assumes LfL sales growth of just 8% YoY in FY22, implying a conservative LfL growth profile for the remainder of the year. Maintain Buy.
Greggs has demonstrated a strong trading recovery through FY21, which gave management confidence to accelerate its Next Generation Greggs growth strategy with the aiming of doubling revenue by FY26. The accelerated growth prospects reflect a combination of better opportunities in the property market due to COVID, helped by Greggs’ innovation in store formats, and pushing ahead with developing revenue in new channels and underpenetrated dayparts, which have trialled successfully. The growth will be supported by further menu development, where Greggs has a strong track record of innovation, and a greater focus on increasing customer loyalty. Our DCF-based valuation is £31.60 per share.
A familiar taste Greggs’ prelims had essentially been pre-announced and the special dividend was in line, so all eyes went to the current trading statement and the outlook report. Two year LFL is up by 3.7%, which is mostly made up of inflation, and the suggestion is that forecasts remain unchanged. Holding on to headline PBT would actually be a pretty good effort given that rate relief won’t recur this year (£15m) but we are not convinced that no profit progress will be enough for the multiple to re-expand. We bring our TP back to £25, which still implies a 20+PE. This is a good company but it is not one that we feel inclined to push as a Buy. Jonathan.Pritchard@peelhunt.com, John.Stevenson@peelhunt.com
FY21 PBT was in line with recent upped Q4 expectations at £145.6m (+34% 2YoY), despite growing cost headwinds towards the end of 2021, coupled with 2022 pay awards brought forward. This implies H2 PBT of £90.1m, +23% 2YoY, with EBIT margins +150bps 2YoY. As pre-reported, full-year total sales were +5.3% 2YoY, with company-managed store LFLs of -3.3% 2YoY (Q1: -21.5%, Q2: +2.8%, Q3: +3.5%, Q4: +0.8%) owing to lockdown restrictions impacting trading in Q1. Year-end net cash was £198.6m, in line with expectations and helped by working capital inflows. As indicated at the Q4 trading update, management has declared a special dividend today of 40p given the strength of the balance sheet. Strategic progress is underway with management planning to extend late opening hours to 500 shops (from c. 100 currently) this year as well as making delivery available in 1,300 shops (from 1,000 currently). Initial trials in 100 shops show that by combining walk-in with delivery sales, the evening daypart accounted for an average of 17% of daily sales. In the meantime, downloads of the Greggs App are now in excess of 1m with management expecting digital engagement tools to be deployed at scale in 2022 driving frequency and basket sizes. Elsewhere, management will continue to optimise supply chain investment for growth and also expects the majority of year one Greggs Pledge targets to be met. For further details of Greggs’ recent CMD, see our note here Outlook: For the first 9 weeks of the year, LfLs are +3.7% 2YoY, however management is mindful of mounting cost pressures in raw materials, energy and store labour which are currently running ahead of initial expectations. As such, it continues to expect broadly flat profit growth in FY22, we therefore leave our PBT forecasts broadly unchanged, see details overleaf.
Roger, Over and Out Greggs’ cost control was exemplary in 4Q and whilst the sales number is slower (not surprising given poor footfall in December), there’s still an upgrade here. However, cost inflation will become more of a factor next year and any progress in PBT would be a good effort. Greggs has had a great decade, and the departure of the CEO is a blow, however strong his replacement may be. The roadmap to growth is clear, but short term it may be that forecast momentum is flat and therefore the multiple feels too rich for us. We edge our TP up to £30 but stick with Hold. Jonathan.Pritchard@peelhunt.com, John.Stevenson@peelhunt.com
Q4 two-year LfL sales are +0.8% (Q1: -21.5%, Q2: +2.8%, Q3: +3.5%) with the cessation of VAT relief in the period contributing to some deceleration (c. -200bps) in LfL since Q3. Nevertheless, this was a robust performance given trading was impacted by both labour and supply chain disruption, as well as challenging conditions from lower footfall - owing to the new coronavirus variant. We understand seasonal lines continue to prove popular, as do new Vegan lines. Store pipeline: A net 103 new stores have been opened this year– with delivery service now available from 1,000 stores (Q3: 900). Going forward - in-line with its stated strategy at the recent Capital Markets Day - management intends to open a net 150 new stores in 2022. Outlook and profit expectations: Cash generation was strong in the period, with year-end net cash at £198m (INVe: £117m) helped in part by one-off working capital inflows that will reverse next year. Pleasingly, despite growing cost headwinds towards the end of 2021, coupled with 2022 pay awards brought forward, good control over operating costs means management now expects profits to be “slightly” ahead of expectations. We upgrade FY21E PBT by c.2%. Going forward, management continues to expect food input price and wage inflation pressures to increase into 2022, thus we leave our outer year forecasts essentially unchanged. CEO Succession: Separately, Greggs has today announced the appointment of Roisin Currie, currently Greggs Retail and Property Director, as CEO effective from the Company’s AGM in May 2022. Roger Whiteside will step down from the Board at the close of the AGM, but will remain available to support the transition process until his notice expires on 5 January 2023.
Gregg’s Q321 trading statement (to 2 October) indicated improved revenue momentum despite recent supply chain and staffing disruptions and an increase in FY21 profit expectations, although rising inflationary pressures (ingredients, staff and utilities) are expected from Q421. This suggests a more challenging FY22 from a cost perspective. Management set a new ‘ambitious’ five-year target (to the end of FY26) to double revenue to £2.4bn (CAGR of 14–15%) from an equal combination of accelerated space growth (number and average size of stores) to reach at least 3,000 stores and space productivity from both ongoing (delivery and evening day part) and new (enhanced loyalty and marketing) initiatives. Simply put, the ambition is to extend Greggs’ strength from daytime retail to an all-day multichannel. Our forecasts are under review.
Management delivers a credible strategy at its CMD Having outlined management’s new strategic developments from its Capital Markets Day in our report yesterday. Unlocking a £1.2bn growth runway, 05-10-2021, we provide further notes overleaf from five presentations delivered by Greggs’ management. These include sections on: Estate growth, Extending trading hours, Delivery and digital, Marketing and loyalty, Supply chain and IT requirements In short, we felt management provided strong reasons to believe that its plans to double sales in five years are credible. Pushed on where margins could ultimately land, having doubled sales, management was keen to maintain flexibility, but also remind investors that leverage gains would be re-invested back into maintaining its competitive position. At the same time, management was keen to highlight that it has the ability to potentially pay additional shareholder distributions in the near term and beyond the peak investment phase.
Q3 two-year LfL revenues are up +3.5% with a particularly strong performance in August – helped by the “staycation” effect – and a solid result in September. Previously, two-year LfLs were reported as having been up +0.4% in July at the beginning of the quarter. Management attribute the performance to further extension of the vegan range as well as Pizza and savoury boxes helping the delivery channel – now available in 943 stores. Year-to-date, a net 84 stores have been opened – 33% in drive-thru locations. Management continues to expect to open a net 100 new stores this year. Outlook: Two-year LfLs have been tracking at +3% (four weeks to 2nd October), although management reports that there has been some disruption to the availability of labour and supply of ingredients/products in recent months. Therefore, with food input inflation pressures increasing, it expects costs to increase towards the end of 2021 and into 2022. However, given good operational cost control and strong Q3 sales, management now expects full year PBT to be ahead of our previous expectations. We upgrade our forecasts by +6.5% this year, but leave outer year forecasts broadly unchanged. Strategic developments: Management now has ambitious targets to double revenues over the next 5 years to c. £2.4bn in 2026. This should be achieved by accelerating the rate of net shop openings to c.150 p.a. from 2022 onwards (versus 100 p.a. more recently) and thereby growing the estate to at least 3,000 shops. It also plans to develop its multichannel sales by extending evening trading, building on the success of the delivery channel and improving customer loyalty via the new Greggs app. We provide a more detailed summary of strategic developments overleaf. As such, we estimate new ambitions imply “double-digit” CAGR revenue growth (and likely profit growth too), suggesting the valuation on 25.1x FY22E PE is undemanding.
Greggs’ H121 results demonstrate how well management has steered the company through COVID-19, notably the re-instatement of the interim dividend. Management is now firmly focused on delivering on its refreshed long-term growth strategy. We have upgraded our FY21 PBT forecasts by 7% to reflect the resilient trading and cost control. Our forecasts for revenue, PBT and dividends in FY21 are higher than reported in FY19, despite the ongoing disruption to some parts of the estate, highlighting the success of new initiatives that are expected to enhance future growth prospects. On our new forecasts, the P/E multiples for FY21 of 26.8x and FY22 of 24.7x are below recent peak multiples.
Tasty but not cheap The interims reported on a half in which Greggs showed admirable sales retention and good cost control. £55m of PBT was considerably ahead of the FY19 performance and strategy and the tactics are clearly resonating loud with customers. Did we learn anything really new today? Current trading is robust (up on FY19 in July) and there was a small upgrade (the market knew it was coming). Is that enough to kick the shares on? We lack the imagination to see a rerating from their current lofty valuation: there may be some juice left in the forecast (Greggs is very operationally geared) but it is a Hold to us. Jonathan.Pritchard@peelhunt.com, John.Stevenson@peelhunt.com
H1 FY21 PBT was £55.5m (LY adj. PBT: -£64.5m) with profits impacted by store closures in Q1 when two-year LfLs sales fell -21.5%, but helped by structural cost reductions and retail business rates relief, the latter worth circa £13m. Q2 two-year LfL sales improved to +2.8% following the re-opening of non-essential retail in April. Net cash was £118.3m (LY: £26.2m net debt) reflecting the recovery in trading and related working capital inflows. An interim dividend of 15p has been declared and management intends to maintain cover of 2x going forward. Delivery continues to contribute meaningfully to sales – representing as much as 8.5% of sales in H1, implying 7.8% of sales in Q2 – proving that the delivery channel is more than a lockdown phenomenon, in our view. Delivery is now available in 837 stores. In the meantime, following temporary suspension in 2020, the new product development pipeline has been restarted with recent launches in vegan-friendly ranges, while management also sees opportunities in pre-ordering – helping to improve availability and support the evening daypart menus, an area where Greggs under-indexes. Store opening pipeline remains intact with 48 new shops opened (37 net), with 70% of shop openings in car-accessed locations. Management continues to expect to open 100 net new stores this year, implying that store openings will be back-end weighted. Outlook and forecasts: 2-year LfLs have been tracking at +0.4% throughout July – despite weather causing some volatility. With the outlook improving across H2, we upgrade this year’s PBT forecast by +2.8% and continue to assume 2-year LfLs remain positive. However, we leave outer year forecasts broadly unchanged: Going forward, cost inflation is likely to become a headwind towards the end of H2 and we remain mindful that tailwinds from retail business rates relief are set to reverse. Still, valuation on 23.1x FY22E PE remains undemanding. BUY.
Greggs’ Q221 trading has surprised on the upside, with positive two-year like-for-like (lfl) sales growth continuing through the end of the period, having previously reported a return to growth earlier than expected. We upgrade our revenue forecasts for FY21, assuming a positive lfl outturn for the rest of the year, versus negative previously, leading to PBT upgrades for FY21 and FY22 of 18%. The strength of the recovery also leads us to increase our dividend forecast for FY21 by more than 150%. The P/E for FY22 of 22.4x is consistent with Greggs’ average trading multiples before COVID-19, reflecting its medium-term growth outlook and shareholder returns, but below prior peak multiples.
Achieving high standards Greggs’ positive two-year LFL has continued (1-3% in May/June) and that is ahead of its own internal expectations, so profit guidance has risen. Management had expected the opening of other cafes and restaurants to slow things up but no such trend has emerged. We expect the strong retail footfall trends to continue and for general consumer confidence to remain high. So the good form should persist and new numbers look underpinned: consensus will rise by just over 10% today (us by a bit more). The shares knew this was coming though, and the valuation is still punchy: we stick with our Hold. Jonathan.Pritchard@peelhunt.com, John.Stevenson@peelhunt.com
LFLs still positive. Greggs has continued to experience a strong recovery in performance since it last updated on 10 May. Management had expected the reopening of cafes & restaurants to result in increased competition. In recent weeks, the impact of retail pent-up demand has reduced, but June’s LFL sales growth in company-managed stores were up between 1% and 3% versus the same period in 2019. This compared to the -3.9% LFL performance for the 8 weeks to 8th May when 2 year LFLs accelerated to positive territory in the final weeks after non-essential stores re-opened on 4th April, despite many Greggs shops offering a more limited range. Management anticipates there would be a materially positive impact on profits if this sustained level of sales recovery continues. More guidance will be given with the 1H results on 3 August. Increasing FY21E/FY22E PBT by 26%/23% to £131m/£145m. Implied within our forecast is flattish 2H sales versus 2019, compared to our previous assumption of down 5%. We note consensus was already above our forecasts before this update, looking for FY21/FY22 PBT of £111m/£126m according to FactSet. Assuming no further disruptions to trade, Greggs is on track to resume a dividend payment in our view. Valuation (CY22E PE 21.1x) remains undemanding and in our view does not reflect cash generation nor Greggs’ long term growth prospects. The strong recovery in trading shows the brand’s strength. Management is looking to open a 100 net new stores this year as well as continue to develop its delivery channel which has taken off during the pandemic. Our TP rises to 3770p (previously 3137p), reflecting the upgrades.
Gregg’s trading update indicates a strong rebound in trading since the re-opening of non-essential retail in April 2021, with positive like-for-like (LFL) sales growth versus FY19, which is earlier than we had expected. This is significant as it has been achieved despite not operating at full potential (ie reduced SKUs, shorter opening hours and other social distancing measures) and competition has been more limited, though both will normalise in coming months. With strong cost controls, including temporary benefits, the board believes that FY21 profits could be around 2019 levels in the absence of further restrictions. We upgrade our FY21 PBT forecasts by 64%, due to a less pessimistic LFL sales assumption.
Time to eat humble pie Greggs has excelled itself throughout the crisis and now looks likely to reach 2019-like profit numbers this year, something we didn’t expect until c.FY23. Current LFL sales (versus FY19) are up, despite social distancing causing queues outside many stores since restart 3. Short-term cost savings are becoming permanent, and the competitive outlook is benign, so the high multiple looks increasingly bearable. This hasn’t been our finest hour, recommendation wise, and we must take our medicine with upgrades to our forecasts, our TP and our rating. We move from Sell to Hold and increase our TP from 1,750p to 2,500p. Jonathan.Pritchard@peelhunt.com, John.Stevenson@peelhunt.com
Trading improves materially, with 2-year LfLs increasing from -23.3% (for the 10 weeks to 13th March) – when stores were closed – to -3.9% in the most recent 8 weeks, ending 8th May. Specifically, LfLs accelerated meaningfully when non-essential stores re-opened on 4th April – 2-year LfL rates have since been positive despite many shops offering a more limited range. As such, management believes that shops have benefitted from pent-up demand and reduced levels of competition. We note that, once cafes and restaurants re-open in the coming weeks, competition is likely to normalise. Pleasingly, delivery continues to contribute meaningfully to sales – representing as much as 8.2% of sales in the most recent 8 weeks (versus 9.6% for the first 10 weeks of the year) – proving that the delivery channel is more than a lockdown phenomenon, in our view. Delivery is now available in 800 stores, but we believe there could be some upside to this figure. Store opening pipeline intact with 34 new shops opened to date, including 13 franchise partners. The majority of openings continue to be in areas that are accessible by car and we continue to believe management can open 100 net new stores this year. Outlook: Overall sales are expected to be stronger than previously anticipated, assuming restrictions continue to relax in line with current plans, while costs have been well-controlled and cost inflation remains in line with expectations. “Profits likely to be around 2019 levels” given recent trading and in the absence of further restrictions. We therefore upgrade FY21E PBT by +70%, which assumes that sales densities (versus FY19) remain slightly below for the remainder of the year. Next year, we assume sales densities fully return to FY19 levels, while remaining mindful that tailwinds worth £20m from government support are set to reverse. Our PBT forecasts in outer years increase by +23%, as does our target price to 3137p.
Greggs’ FY20 results were in line with expectations and highlight a year of two halves from a profit perspective. COVID-19 wrought the most damage in H120 before ‘better’ revenue and cost management restored the H220 operating margin back to normal levels (10.8%). Although current trading remains negative (-28.8% for the first 10 weeks of FY21), it is better than we and management expected and momentum is improving, leading us to increase our FY21 PBT forecast by c 5%. There is a very clear message that management is looking to the future by re-activating the store opening pipeline, accelerating multi-channel distribution and investing further in the supply chain, with more investment likely as management targets a presence in 3,000 locations, 44% more than today.
Good, but not that good Greggs’ Prelims were in line with its guidance with a loss of £14m, which is not a bad effort given how much disruption there has been. We do not think that the pandemic has affected the UK’s love affair with Greggs and current trading is steady enough at -29%. We expect densities to recover in time. The shares have even less doubts and already expect a very swift bounce back: we don’t think it will be quite as easy or as quick as that and with the shares on a multiple more akin to a nascent dotcom retailer, we think they are overvalued. A TP of 1,750p is 20x peak historic EPS. That’s a more realistic valuation to us. Jonathan.Pritchard@peelhunt.com, John.Stevenson@peelhunt.com
FY20 LBT of £13.7m was a touch ahead of our estimate (INVe FY20E LBT: £14.8m) owing to a slightly better cost performance. This implies H2 PBT was £51.5m (INVe: £50.4m). As pre-reported, full-year total sales were -30.5% with company-managed store LFLs of -36.2% (H1 -49.0%) owing to lockdown restrictions impacting trade. Year-end net cash was £36.8m, in line with expectations. Management galvanised by crisis; with Click & Collect rolled out across the entire estate and delivery now available in 600 stores (800 expected for 2021). Management continues to believe the addition of new digital channels is helping to extend its reach to new customers and accelerate development in new product areas - given lower maturity costs in gaining customer support for products. Radical changes to distribution operation, as a result of the pandemic, have also created additional capacity while potentially lowering distribution costs. As a consequence, the proposed investment into the Birmingham site – scheduled to open in 2021 - can be now be postponed for a number of years. 100 net new store openings still expected this year, while management also sees new opportunities to open new stores in central London and mass transport hubs, where lower rents are making locations more attractive. In the meantime, capex in the coming years will re-accelerate to address supply chain capacity and meet growth opportunities. Thus management expect capital expenditure of c.£90m in FY22 (FY23: £100m). LfLs in current trading (10 weeks to13th March) are -28.8%. Outside of Scotland - where stores are temporarily closed - LfLs are -22.4% with trading improving throughout the period. Pleasingly, delivery sales to date have been particularly strong at 9.6% of sales (Q4 FY20: 5.5%) Forecast changes: See details overleaf.
Greggs’ Q420 sales performance was better than we expected due to (in descending order) a faster recovery in sales despite ongoing and variable COVID-19 restrictions; a strong contribution from the new delivery initiative; and more net new store openings (28) for FY20 versus management’s prior guidance (20). The sales performance, improved profitability and a stronger financial position gives management the confidence to return to prior levels of space expansion. The new national lockdown limits our FY21 PBT forecast increase to c 2%.
Reheating slowly Q4 sales were – not unexpectedly – materially down, but profit protection was good. However, the outer year numbers remain difficult to predict, even if the market has made its mind up that they will recover quickly. We are not so sure, even though we believe management is doing everything right and the business is built on firm foundations. We have probably lost the battle in terms of short-term share price direction, but the valuation still discounts far too much good news, and we stick with a Sell. Jonathan.Pritchard@peelhunt.com, John.Stevenson@peelhunt.com
In this note, we seek to outline at a helicopter level how we see the moving parts surrounding the cack-handed announcement of a second lockdown in England by the UK’s Prime Minister, Boris Johnson for the UK consumer economy, focusing mostly on retail and the food system.
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Greggs’ Q320 trading update shows a recovery in sales in line with our expectations. There has been good progress: getting all infrastructure up and running, and adapting to the new environment, both in store (including the Click and Collect service) and in generating strong incremental sales from the new Delivery offer. We retain our existing forecasts. The uncertainty about the recovery in sales leaves the EV/sales multiple for FY21e of 1.1x lower than recent multiples.
Q3 trading, 12 weeks to 26th September: saw company-managed LfLs at 71.2% of last year, with sales in August negatively impacted by the closure of seated areas, hot weather and demand pulled towards venues offering “Eat Out To Help Out”. However, with out-of-home activity improving in September, LfLs were at 76.1% of 2019 levels. Going forward, management now intends to broaden its product ranges and re-open 100 seated areas Digital offer ramps up: with “Click & Collect” now available in all stores while the roll-out of delivery is progressing well and now represented as much as 2.6% of company-managed sales in the most recent week. We note in the unlikely event of a further nationwide lockdown, stores would be able to benefit from the development of new service channels where they couldn’t before. Store roll-out reactivated, with a net 20 store openings now planned this year, predominately in areas that can be accessed by car. Year to date, 11 net stores have closed (38 openings, 49 closures). Elsewhere, having reintroduced more products into stores, all manufacturing operations have reopened despite two recent outbreaks of COVID-19 in Greggs’ distribution and manufacturing facilities. In the meantime, good progress has been made towards the construction of the new automated frozen logistics facility. Outlook & forecasts: the outlook remains uncertain with potential for further social restrictions being imposed and supply chain disruption. We make no changes to forecasts which assume LfLs are at 75% of FY19 levels in H2. With the Job Retention Scheme planned to end in October, management intends to focus on reducing staff store hours in order to match costs with lower levels of foreseeable demand. We continue to assume that sales recover to 90% of FY19 levels in FY21E and 95% in FY22E. Pleasingly, the company has already returned to a net cash positive position in September. (INVe FY20E net debt: £41m).
Greggs’ interim results were heavily affected by the estate closure for the majority of Q220, due to COVID-19. The key takeaways are that operating cash burn during lockdown was in line with management expectations, and current trading, albeit with limited data, indicates gradual weekly progress in revenue, described by management as encouraging. We assume recovery through H121e, before stabilising at a revenue run-rate equivalent to 90% of the level in FY19. The resulting EV/sales multiple of 1.2x for FY21e, is in line with recent multiples. It reflects lower estimated revenue in that year and uncertainty about the rate of recovery.
H1 FY20, IFRS 16 adjusted underlying LBT was £65.2m following the closure of all stores in March and subsequent partial re-opening in June. Total sales for the half were -45% with company-managed store LFLs -49%, having reported LfLs of +7.5% for the first 9 weeks of the year. Net debt was £26.2m reflecting cash operating outflows – management is working to establish a new banking facility in H2. As expected, no interim dividend has been declared. Outlook: In the most recent week, given social distancing, company-managed sales have been tracking at 72% of FY19 levels – at 80%, management believes it would break even. Thus management expects to continue to use support from the CJRS as well as the business rates holiday and recent landlord negotiations mean rents will now be paid monthly going forward. Further tailwinds are expected from commodity cost inflation easing, meaning overall cost inflation will now be 4% (previously 7%) this year. Long-term strategy will continue to focus on rolling out stores and growing the “click & collect” and delivery channels, which management hopes to roll out nationwide in the coming months. Elsewhere, management believes the pipeline for new store opportunities remains strong, although capex will fall back to £55m this year, in line with our expectations, with the pace of store openings temporarily slowing to 60. Brand appeal is broad-based, with the majority of stores located in towns and suburbs. Therefore, Greggs is not materially reliant on custom from office-based workers (many of whom are currently based at home). We understand fewer than 14% of locations are based in public transport, city centre or office location hubs. Indeed, management estimates that no more than 20% of Greggs’ shoppers are likely to have the option to work from home.
The legacy of Coronavirus is still to be determined but for the food system in the UK there appear to be adjustments at a notable level to be potentially evident for the foreseeable future. Evidence is emerging of a significant proportion of the population that is riskaverse, so eschewing much of the re-opening Food & Beverage sector, favouring community hostelries over urban centres, whilst the latter suffer from fewer workers and shoppers too. Indeed, we see technology enabled working from home (WFH) as a potentially key support to the suburban food system; so, the neighbourhood store, supermarket and community public house. Additionally, WFH and greater behavioural caution (e.g. face masks) also are likely to sustain the online channel, a structural problem for the largely onlineless German discount chains. Such moving parts should support the UK supermarkets, Ocado Retail, pub chains like Hawthorn (NewRiver Reit) and Marston’s but work against urban centre and travel hub F&B plays like Greggs.
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The trading momentum of the British supermarkets remains strong as millions of folk remain at home and within their neighbourhoods. If evidence of Liverpool city centre is anything to go by today, life has most certainly not returned to normal, with empty offices, as people work from home, and quiet streets; only the construction workers’ vehicles rebuilding the city occupy the car parks. Within these contexts, the switch from food & beverage to the suburbs continues, so boosting smaller supermarkets such as Iceland and the Coop in particular, whilst the lack of city centre and travel hub traffic hits the likes of Greggs, M&S and Pret-a-Manger; maybe this will partially re-balance in July as lockdown further eases? Online also benefits from the wish by many to stay at home, doubling year-on-year. Within the superstore cohort Tesco UK and Morrisons trade strongly, whilst absent of online traffic the German discounters are now in-liners, with Aldi GB losing market share.
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Phased re-opening of stores Following trial openings for a small number of stores in May, as expected, Greggs will now look to re-open on a larger scale with 800 stores expected to begin trading on Thursday 18th June, with a view to opening the rest of the estate in early July. At this stage, management is unable to predict what the impact of social distancing will be on demand. Accordingly, until demand returns to more normal levels, a proportion of colleagues will be kept on furlough, either partially or fully. As expected, in anticipation of lower sales levels, ranges in stores will initially be restricted to bestsellers. Consequently, it is expected that some manufacturing operation teams will also remain furloughed until they are required to return to work. Further strategic decisions Management now expects to open a net 10 new stores this year (in line with our expectations). Existing agreements with landlords have been reviewed, with management making a variety of proposals in return for rent reductions. As such, going forward, rent will now be paid monthly, following the final quarterly rent payment in March. Elsewhere, 19 stores will be opened solely for the purposes of “delivery” and “click and collect” while investment into the new robotic frozen logistics facility has been continued. Conclusion In our recent note, (Looking into the distance, 19 May) we continue to believe that “under varying assumptions of operational gearing, we expect cash burn would be minimal, even if sales densities remain 35% below FY19 levels for the next 12 months. In reality, we expect downward pressures on sales densities to ease as the government progressively begins to relax lockdown and distancing measures. Therefore, given Greggs value-based, low transaction cost offering, it should be relatively immune from potential ongoing recessionary pressures, while investments into its supply chain and range proposition over many years should support sales and margins. Further efforts to widen delivery channels should support growth as well, while recent reductions in commodity prices could provide margin tailwinds. With no immediate liquidity concerns, we believe the long-term growth story remains fundamentally intact. Buy reiterated.”
Following successful trials, we expect management to start re-opening more stores in June with the whole estate likely to re-open by July. Store formats, queuing systems and ranges will need to be addressed to cope with the problem of ensuring social distancing while sales densities will inevitably be impacted. Scenario analysis for social distancing: Under varying assumptions of operational gearing, we expect cash burn would be minimal, even if sales densities remain 35% below FY19 levels for the next 12 months. In reality, we expect downward pressures on sales densities to ease as the government progressively begins to relax lockdown and distancing measures. Forecasts: We lower our forecasts, and now expect losses of c. £41m this year, following store closures in Q2 and social distancing negatively impacting store profitability in H2. However, importantly, our outer year PBT forecasts decline by much less (FY22E: -12%) with store profitability returning to FY19 levels by H2 FY21E. We expect cash generation to resume quickly once stores re-open, such that we expect Greggs to end the year with £10m of net debt (before dividend distributions). On this basis, with new banking facilities of £150m, Greggs could, in theory, resume paying dividends in H2. Valuation: Given its value-based, low transaction cost offering, Greggs should be relatively immune from potential ongoing recessionary pressures, while investments into its supply chain and range proposition over many years should support sales and margins. Further efforts to widen delivery channels should support growth as well, while recent reductions in commodity prices could provide margin tailwinds. With no immediate liquidity concerns, we believe the long-term growth story remains fundamentally intact. Our new target price is 1,788p (based on 25x FY21E PE). Buy reiterated.
The often much maligned and somewhat humble supermarket has been redefined by the Coronavirus crisis. Supermarkets are now clearly central to both the nation's wellbeing but also national security, as evidenced by stockpiling and rationing. As such, their strategic importance, standing and stock ratings should respond, in our view. In a British context, post-Brexit, the supermarkets will also be key agents in any new food policy, particularly if animal welfare, substitution and sustainability are to the fore. Quite how long the shift in calorie intake from the out-of-home (OOH) channel to retail persists remains to be seen, as will the future of workplace and food demand in city centres versus suburbs. Coronavirus has also shifted online participation higher, in just weeks bringing what normally takes years. In aggregate, entering the unlocking phase, the grocery element of supermarkets is set to benefit from the new normal.
Greggs has justifiably been one of the UK consumer industry stock market darlings of recent years; all credit to Roger Whiteside & Co. for the re-engineering of the offer and the reinvigoration of the brand. The Coronavirus crisis is a disaster for Greggs. FY2020 will see an earnings and dividend wipe-out. We would expect rebuilding in the years thereafter but with a somewhat depleted balance sheet. It will take some years to rebuild to FY2019 EPS, in our view, as new norms impact Greggs' earnings from a sales and cost perspective. Indeed, social distancing and behavioural change, less commuting and a decline in employment, could represent a perfect storm for Greggs. Whilst an adaptable and very well-operated business, strong management and a leading value proposition are all virtues, we feel that 19.6x peak earnings (FY2019) represents an unfavourable risk-reward equation given that medium-term earnings could be materially lower than pre-Coronavirus levels. As such, Greggs could be structurally de-rated on a lower earnings base. After a period under review we downgrade our recommendation from Hold to SELL.
£150m CCFF facility Greggs has secured a £150m facility from the Bank of England’s CCFF scheme. Management believes it can meet the Group’s liquidity needs for a prolonged period of closure where shops are unable to trade for the rest of the year. Cash burn outlook Following clarification on the details of the Government's Job Retention Scheme and further examination of its cost base, management now believes that, after meeting existing liabilities relating to recent trading and the capital investment programme over the near term, net cash outflow will be c.£3.5m per week until the end of June. From July onwards, the cost is anticipated to be c.£4.5m per week (including property rents). Previously, management had anticipated weekly cash outflows of approximately £6m (including property rents) when it last addressed the market on 23rd March. Forecast sensitivity The cash position is now £47m having been £60m as at 23rd March; we suspect the decline can be explained by working capital unwinding – Greggs had trade payables of £142m at its prelims. Last year, Greggs made c. £19m of EBITDA per month. Assuming stores are closed from March to the end of June and that EBITDA per month remains in line with FY19 levels in the months that stores are open, EBITDA for this year would be approximately £129m. This would imply that Greggs is currently trading on 13.8x EV/EBITDA, but based on FY21E EBITDA, which arguably has better earnings visibility, the valuation is just 6.9x.
COVID-19 will have an uncertain but important impact on Greggs' profitability in FY20. The profit and cash flow impact of lost sales will be mitigated by internal initiatives and government support on operating costs (rates and employees). The strong balance sheet means that Greggs is well placed for tougher times. Our forecasts are now under review and we are planning to publish a note to update them shortly.
Management has decided to temporarily close all stores and intends to maintain employment of colleagues at full contract, for as long is practical. Trading up to March At the Prelims (3rd March), Greggs announced that company-managed shop LfLs were +7.5% (9 weeks to 29 February). For the two weeks that followed, LfLs were +4.1% falling to -9.9% in the week to 21st March. The rate of decline has increased since, with footfall levels being impacted by “social distancing” Financial position At the end of this week, management expects to have £60m of net cash on its balance sheet having made normal payments to staff, suppliers and landlords (including a March quarterly rent payment) Capex will be reduced by £45m (we had previously forecast FY20e capex of £100m) and will only be used to complete existing shop projects, whilst deferring new shop openings and planned refurbishments. Similarly, supply chain capex will only be used where necessary to maintain continuing operations and building work will be delayed, with the exception of the automated cold store project which is strategically important The final dividend (due to be paid on 21st May 2020) will be cancelled as well as EBT purchases, saving £40m Weekly cash outgoings are expected to be £5m per week assuming Greggs receives relief for business rates and employment support (via the Job Retention Scheme). This estimate includes rents paid monthly in advance, but not those paid on quarterly in advance, which total £11 million per quarter and next fall due at the end of June. Management has also approached the Bank of England for support from the CCFF. Guidance & valuation Management cannot provide forward guidance in the current environment However it now does not expect to make year-on-year profit progress, We place our forecasts under review until we have better visibility, but on pre-existing numbers, the FY21e PE is now just 13.9x, having been 20.5x at the Prelims on 3rd March.
Greggs’ FY19 PBT was 1% ahead of our expectations and current trading suggests it will continue to take market share in the growing food-on-the-go market. Greggs has many opportunities to accelerate growth in the medium term: more and larger stores; the shift from a single channel to multichannel; further product innovation; and more investment in its supply chain, funded by strong cash generation. There is near-term risk, as with the sector in general, if the coronavirus results in people staying away from public places. Our PBT forecast for FY20 increases by 2% and our DCF-based valuation increases by c 4% to 2,188p.
FY19 PBT of £114.2m (+27.2%) was a touch ahead of our estimate (INVe: £112.9m) owing to a slightly better gross margin performance. As pre-reported, full-year total sales were +13.5% with company-managed store LFLs of +9.2% (H1 +10.5%; H2 +8.1%). Year-end net cash was £91.3m ahead of our forecasts (INVe £56.2m) owing to working capital and capex phasing. As such, capex guidance for next year is now £100m (previously INVe: £85m) which will be used for investment into capacity at the Treforest, Birmingham and Balliol Park sites as well as estate growth. We therefore now expect FY20E year-end net cash of c.£99m, some way ahead of management’s new targeted year-end cash position of £50m. A capital return is therefore probable at the interims in our view (depending on the current trading environment between now and then). We believe the magnitude of the surplus cash return could be between £30m to £40m LfLs in current trading (9 weeks to 28th February), is +7.5% versus +8.7% at Q4 FY19, which still implies, on our estimates, that the two year LfL rate has been maintained at >+15% (Q4 FY19: +13.9%) . We understand trading in January was very strong, offset by weather (storms) impacting footfall in February (it even resulted in the temporary closure of the Treforest site). Costs are expected to rise above normal levels in FY20 due to a combination of higher pork prices and wage growth. However, instead of passing on the cost to consumers, management’s preferred strategy will be to forego some of last year’s exceptional margin gains and thus absorb some costs. Forecasts & valuation: With added uncertainty surrounding coronavirus, we leave our forecasts unchanged but consider them to be well underpinned; we assume FY20E LfLs of +5%. On 21.9x FY20E PE, we believe the valuation remains undemanding for a company growing LfLs in “high single digits”, potentially returning cash while also growing space. BUY reiterated.
Greggs finished 2019 with accelerating revenue growth. It continues to benefit from increasing customer growth as the brand strengthens and it takes share in the ‘food-on-the-go’ market. With increased cost pressures, management remains confident of mitigating these through ongoing business efficiencies and select price increases, where possible, and some one-off benefits. Our forecasts, which are at the high end of consensus, are broadly unchanged. Our DCF-based valuation is 2,096p.
LfL momentum continues with Greggs achieving company-managed LfLs of +8.7% (2 year: +13.9%) across Q4 versus +7.4% (2 year LfL: +10.6%) at Q3. This also implies that trading in later November and December continued to be strong at (c. +9%), given LfLs were recently reported to be up +8.3% for the 6 weeks to 9th November. As such, total full-year sales were +13.5% and the estate grew to 2,050 shops. Performance continues to be driven by both new and existing customers purchasing more frequently and was once again generally broad-based across categories. However, the traditional savoury category continued to outperform, helped by the iconic vegan sausage roll. Going forward, we expect the recently launched vegan steak bake and first vegan doughnut will continue to excite customers as well as benefitting the Greggs brand. Outlook: Given Greggs’ exceptional performance this year, employees will now share a one-off £7m bonus payment and management expect forecasts (after the cost of the bonus payment) to be “slightly” higher than previous expectations. Next year, management intends to roll out 100 net stores, but remains mindful of headwinds from higher National Living Wage costs and pork prices, much of which we expect to be mitigated by efficiencies. Forecasts and valuation: We upgrade PBT by +1.7% this year and by even more next year, +3.9%, after increasing our FY20E LfL assumption to 5% (previously +2%) – see details overleaf. This implies limited profit drop-through from our increased LfL sales assumption and we thus see our forecasts as conservative. On our revised forecasts, the shares now trade on 25x PE. Despite tougher comparatives, we still see the potential for further sizable upgrades in FY20, cash returns and, in the longer-term, upside to the size of the existing store estate. On this basis, the valuation remains undemanding, in our view.
Greggs’ stellar FY2019 has been confirmed in yet another very strong trading update, with momentum building through the latter period of the 52 weeks ended 28th December 2019. The key features of the update are LFL growth of 9.2% for the year (two-year LFL growth 12.1%), including 8.7% through Q4 against a toughening comparative (LFL growth 13.9% on a two-year basis). Management has also guided for FY2019 profitability to be “slightly higher” than previous expectations although we had already anticipated the continued outperformance and therefore leave our previous above-consensus FY2019 forecasts unchanged, though we nudge up our FY2020 forecasts by c2%. Whilst FY2019 has been a “phenomenal” year for Greggs, we believe a FY2020F PER of 25.5x and an EV/EBITDA multiple of 11.4x fully capture such strength of delivery. Although we see the potential for further FY2020 upgrades in forthcoming months and so reiterate our HOLD stance, with the stock now on our negative watch list we see merit in investors top-slicing/booking some profit given valuations that are priced for perfection and leave no scope for disappointment.
For the past six months Greggs has channelled upgrade pressure from outstanding trading into an increase in investment behind “strategic initiatives” to support medium/long term growth. However, with two-year LFL growth running at c12% against toughening comparatives (our previous expectation: c10%), management was forced to issue an impromptu trading update (11th November), which leads to our fourth forecast upgrade of 2019. Trading has been ahead of expectations across all categories and meal occasions, driven by transaction numbers, which leads us to upgrade our FY2019 CPTP expectation by c5% to £113.5m, EPS of 88.3p (year-on-year growth of c26%). With our medium-term forecasts also upgraded (FY2020F EPS +5.7% to 93.2p), Greggs stock trades on a December 2020F of 22.0x and is forecast to yield 4.2% (including special returns). Whilst Greggs continues to outperform our expectations, we see current valuations as both capturing current trading momentum and the risk from a LFL cliff-face in Q1 (>11% through Q1 2019). We reiterate our HOLD recommendation.
Greggs’ trading update for the first six weeks of Q419 highlights an improvement in sales growth. Like-for-like (l-f-l) sales growth of 8.3% follows 7.4% in Q319 and is against a tougher comparative, allaying fears about Greggs’ sales momentum. We upgrade our l-f-l sales forecast for FY19 by 70bp to 8.6% growth, which feeds through to PBT forecasts increasing by 4.6% in FY19 and 2.8% in FY20. Our DCF-based valuation increases to 2,091p.
Trading accelerates in Q4: Trading has accelerated across October and November, achieving company-managed LfLs of +8.3% (6 weeks to 9th Nov) versus +7.4% at Q3 (13 weeks to 29th Sept). Total sales were +12.4%, over the period, in line with Q3. This implies that Greggs has been able to accelerate 2-year LfLs ahead of its initial expectation for +10% in Q4, to c. +12%, despite tougher two-year comparatives over the period. Growth continues to be broadly consistent across categories and throughout the trading period with increased customer visits driving growth. We understand that the savoury category outperformed. Pleasingly, we believe strategic initiatives implemented over H2 are progressing well (with better availability of hot food options and “post-4pm” deals aiding stores to extend opening hours) and we expect delivery service trials to show encouraging results, adding incremental demand. Operating costs remain well controlled and despite comparatives getting harder for the remainder of the quarter (LfLs accelerated to c. +6.5% in December last year, having been up +4.5%, 8 weeks to 24th November), management expects profits to be “higher” than expectations this year. We now forecast PBT this year rising +4.6% to £110.9m which is a function of our H2 managed LfL assumption increasing to c. +8%. Whilst most input costs are well covered across H1 next year, management continues to anticipate some input cost pressures from higher pork prices (c. 4% of sales) when contracts roll over in January. Valuation: Following this morning’s upgrade, the shares now trade on 19.6x FY20e PE and an undemanding 7.2x FY20E EV/EBITDA despite offering double-digit earnings growth (CAGR: FY19-21E) as well as a 2.5% dividend yield and further potential yield enhancement from shareholder returns.
Greggs’ trading continues to be impressive, with better-than-expected like-for-like revenue growth in Q319 of 7.4% (against tougher comparatives) offset by lower-than-expected new space growth. In aggregate, trading is in line with expectations, therefore our forecasts and valuation are unchanged.
Robust Q3 trading (13 weeks to 28/09): Despite tougher comparatives, company managed LFLs continue to be strong at+7.4% (total sales: +12.4%) in line with exit trends reported in Q2 with growth driven predominately driven by growth in customer numbers. This implies Greggs have been able to maintain 2-year LfLs at over +10% in Q3. We understand growth was broadly consistent across categories and throughout the trading period. Strategic initiatives are progressing well, with better availability of hot food options and “post-4pm” deals aiding stores to extend opening hours. Management now expects to roll out extended store opening hours to 100 stores by year end. In the meantime, delivery service trials are experiencing encouraging demand, winning incremental business and new customers. Store openings: on track for 90 openings with a net 56 opened YTD (90 openings, 34 closures). Elsewhere, the construction of the new southern distribution centre at Amesbury is likely to complete by the end of the year which will have the capacity to reach 250 new and existing stores as well as providing capacity for further future expansion in the south of England. Forecasts and outlook: Management continues to believe that cost inflation from labour and food input costs will continue in line with previous expectations, for the remainder of the year, while sales growth is likely to moderate, given toughening comparatives, in Q4. We leave our forecasts unchanged. Valuation remains attractive (8.7x FY20e EV/EBITDA). The recent de-rating offers an attractive entry point in our view for a cash generative, multi-year store roll out story with a track record for generating upgrades. BUY
Greggs’ interim results highlighted that the consumer is responding well to the company’s transition to a leading food-on-the-go retailer. This has led to record revenue growth and a step change in gross margin, as well as enabling further investment to fund future growth initiatives, while funding a special dividend as expected. Our forecasts are broadly unchanged following four upgrades in six months.
An unscheduled trading update confirming exceptional 11.1% like-for-like (l-f-l) sales growth in the first 19 weeks of FY19, and a fourth earnings upgrade in six months is testament to Greggs’ outstanding progress on the repositioning of the brand as a leading food-on-the go-format. We increase our FY19 and FY20 underlying PBT forecasts by 9%. The company is highly cash generative and likely to distribute part of the substantial cash balance (FY19e: £102.6m) with the H119 dividend.
Greggs’ substantial progress with the brand transformation, backed by savvy use of social media, helped to deliver robust FY18 results, in spite of weather extremes, and an outstanding start to FY19. Consequently we have upgraded our forecasts three times since late November. The company is highly cash generative and likely to distribute part of the substantial cash balance (FY19e: £92.9m) with the H119 dividend.
After only seven weeks, Greggs’ vegan sausage roll has already led us to an upgrade, our third in two months. With its smart approach to social media, the company is succeeding in disrupting out-of-date perceptions, which appears to be bringing new customers into the stores. While multiples are optically high, we believe there may be further upgrade potential.
Greggs, the leading food-on-the-go retailer, has continued an impressive upwards trend in like-for-like (lfl) owned-store sales growth across Q4, and in the final five weeks of FY18e. The company is successfully drawing new customers into its stores with strategic product launches and efforts to reduce queues and improve product availability. We upgrade both our FY18 and FY19 PBT forecasts for the second time in six weeks, by 3%.
An unscheduled trading upgrade confirms impressive stronger than anticipated sales growth in October and November, on the back of a robust Q3 and tough prior year comparatives. Cautiously factoring in slightly weaker Christmas trading as shoppers increasingly favour buying online, we raise our FY18e PBT by 6.4%. Our valuation increases to 1,516p.
Greggs’ sales growth has accelerated through each quarter, in defiance of the summer 2018 heatwave conditions that turned many retailers’ performances on their heads. Greggs has passed the scorch test, thanks to the change strategy that the brand has quietly achieved: a change in its locations, its value menus, its customers and its trading dayparts. This result is significant and should help challenge out-of-date assumptions about Greggs. We retain our 1,360p valuation.
Greggs’ interim results, against a backdrop of extreme weather conditions, reinforce progress with the strategic transformation of the brand into a leading ‘food-on-the-go’ format. Innovative new product ranges, a reduced dependence on high street footfall and a major overhaul of the supply chain are creating a solid platform for the next stage of the journey. We forecast strong cash generation and a return to earnings growth in 2019.
Greggs’ management has been open in recognising that despite the Beast from the East and other extraordinary weather patterns, there is an underlying softening of demand. We have reduced forecasts, but see earnings growth continuing from a combination of like-for-like sales, shop expansion, and investment in the estate and manufacturing and fulfilment infrastructure. Greggs’ value positioning should place it well in a tight consumer market, and at these levels the valuation is attractive.
Five years into its strategy, there is plenty for Greggs to do. Its shops, which all now look and work like value food-on-the-go outlets, must spread out from their high street origins. Its manufacturing bases are being transformed, at substantial projected returns. But most importantly, its wide-ranging food offer will take time to be known by non-customers, we believe. Their gradual buy-in should provide a tailwind to Greggs’ mission to gain share.
Greggs’ Q4 sales update demonstrates a robust performance in what has been a tough retail market. The company’s self-help strategy shows that this is a business firmly in control of its own destiny. Management expects that the industry-wide cost pressures seen in 2017 will continue in 2018 although at lower levels. Greggs expects to deliver full year results in line with management expectations. A combination of strong trading momentum, easing margin pressures and continued self-help gives us confidence in our 2018 forecasts, which we leave unchanged.
Greggs’ strong sales quarter reflects its secure place in the value sector of an increasingly edgy retail market. But it is also driven by a range of factors including menu development, estate upgrade, store ordering, and extensions to the range of dayparts and locations. With margins carefully controlled and wastage from the new ordering system starting to reduce, we expect those factors to continue to propel the company to outperformance within a constrained wider economy.
Greggs’ interims show a company in balance in several ways. First, operational and site development initiatives are driving consistent sales growth despite a challenging market. Second, the balance between low-price value and perceived quality is allowing it to cover peak input cost increases without a serious impact on margins. Third, the financial model is operating to support the dividend with a stable balance sheet.
Greggs (GRG LN, N/R) senior management team of Roger Whiteside (CEO) and Richard Hutton (FD) presented to Whitman Howard’s UK equity salesforce yesterday. While Gregg’s differs from mainstream sandwich manufacturers because of its extensive retail network the central message for the Food on the Go/Food to Go was clearly positive. Greggs itself benefits from outlet expansion, discrete new product development and a clear commitment to product quality. Financially, the company appears well placed to deliver on further cost control and free cash flow generation.
Greggs has traded strongly for the first 19 weeks, and self-help measures such as refurbishments, openings, manufacturing rationalisation and product development continue to offer potential. Whether switching customers would be a net benefit in a consumer squeeze is uncertain, but the proposition is considerably stronger than when real wages were last negative. We retain our forecasts and valuation.
Given Greggs’ long track record of strong cash generation and the success of the 2013 strategic plan to date, it seems reasonable to look beyond the short-term impacts of input cost rises and government-imposed cost increases to the benefits expected from the current investment programmes. Employing a DCF model to do precisely that, we generate a valuation of 1,226p per share.
Greggs' trading update confirmed that it delivered a stronger than expected finish to FY16, leaving it well placed to face the margin pressures that will affect the entire industry in FY17. We expect only modest changes to FY17 estimates when FY16 results are released and therefore continue to value the shares at 1,189p.
Greggs enjoys a differentiated position in the growing food-to-go market. Its strategy to enhance its offer and improve the efficiency with which it delivers that offer has yielded good results so far and remains on track. Although the industry faces input cost headwinds in FY17, Greggs has the financial strength to withstand them and the benefit of the continuing strategic initiatives to offset them.
The Leave outcome is bad news for the UK consumer cyclical stocks. The anticipated political uncertainty and UK GDP slowing will not help in the next 12-24 months, but we feel none of the risks are new to the sector and in time will be surmountable. Companies with international exposure are best placed to protect earnings. Those with a heavy UK earnings bias and with substantial exposure to food input costs are less well placed potentially. In this brief morning comment we recap our previously articulated sector and stock specific risks in the event of a Leave outcome.
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Greggs has issued a solid trading statement, successfully navigating tough comps and difficult trading conditions in March and April for the retail/leisure sector to report 3.7% LFL sales growth after 18 weeks. There is also positive commentary around various other key issues. We make no forecast changes but continue to see upside risk. We expect today’s update to act as a catalyst to reverse YTD share price weakness and advocate fair value towards 1200p on >10% TSR considerations.
Greggs’ appeal lies in the combination of its relatively low-risk business model and its return to strong earnings growth in the past two years. It is in the middle of a strategic plan that has delivered impressive financial results and has the financial strength to complete that programme. We value Greggs at 1,158p per share.
Greggs has reported FY15 finals slightly above expectations, has had a cracking start to FY16 with 4.2% LFL sales and outlined a cost efficient plan to grow the estate significantly beyond 2000 shops. We upgrade FY16-FY17 EPS by 2-3% and believe the risk is on further upside. We see fair value towards c.1200p.
The investment case remains quite compelling given further internally driven top-line and margin enhancement potential. Greggs is now entering year 3 of a 5 year ransformation programme, so there is still a lot more to do. Whilst an FY16 P/E of 18x looks up with events, we feel there is good momentum for upgrades to flow through as 2016 progresses and for the shares to outperform.
Greggs has managed to navigate a challenging Q4 for the UK high street to report an in line outcome for FY15. We feel this is a positive closing to a hugely successful year which is projected to deliver 27% y-o-y EPS growth, following a 42% uplift in FY14. We make no changes to forecasts except for an upgrade in cash. Going forward, we have high conviction that the positive consumer backdrop and a much improved retail/product proposition will allow Greggs to be a winner in the growing food-onthe-go sector. In the short-term the shares on a cal’16 P/E of 21x look up with events.
Another positive update from Greggs today with Q3 LFL growth comfortably above our assumption. There is also good commentary around various strategic initiatives to help support ongoing EPS momentum. The strength of today’s IMS should help reverse recent share price underperformance on Q3 LFL concerns and profit taking. We push through 3%-4% 3 year EPS upgrades and see fair value >1400p (25x FY16 EPS).
H1 results are much stronger than anticipated with PBT +52% and LFL’s c.6% vs. our 5.5%. Momentum going into H2 is good and this is reflected in a positive outlook statement. Greggs has also been clear about the NLW, with its starting position relatively favourable thus limiting any short-term earnings impact. We push through further EPS upgrades of 2.5% - 4.5% which help underpin the premium rating. We firmly feel that Greggs’ business model is in great shape and on growth considerations/ returning excess cash to shareholders see fair value towards 1400p (25x FY16 P/E).
