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 has traded strongly in Q3, with total sales up 8.6% and like-for-like managed store sales up 5.0%. Both were significantly ahead of H1 growth of 7.3% and 3.4%, respectively. The retail climate supports Greggs’ value offer, but self-help measures such as the forecasting and replenishment system are also contributing.
Menu evolution is central, with sales growth led by breakfast, and seasonal choices being added to flex factors. There has been good supporting growth from traditional products such as pastries, sandwiches and sausage rolls. Growth is widely based across locations with travel and workplace units the fastest growing.
To date there have been 98 openings and 32 closures, and management reiterates its full-year targets of 140-150 openings and 40-50 closures, a net increase of c 100. With 120 refurbishments complete, Greggs remains on track for c 130 in the full year. The steady upgrade of the estate is undoubtedly a factor in sales growth.
In addition to labour, this year cost inflation resulting from sterling weakness has been a significant cost pressure. However, the greatest impact of this was earlier, with the rate easing in Q4. The new forecasting and replenishment system has also resulted in some additional product wastage, which is slower to resolve than originally expected, and may result in higher cost of sales than originally expected, although the net benefits of the change are positive.
Mainly as a result of the margin uncertainty mentioned above, management is reiterating profit guidance for the year. We retain our forecasts and our valuation of 1,226p per share, although we sense potential upside at pre-close.