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.
Greggs has reported a trading update for the start of Q419 covering the first six weeks to 9 November 2019, highlighting improved sales growth. Total sales growth was 12.4% and l-f-l sales growth in the company-managed stores was 8.3%. This was against an l-f-l comparative in Q418 of 4.0%, giving a two-year growth rate of c 12.6% (compound), an acceleration from the two-year growth rate in Q319 of c 10.8% (compound of Q319 l-f-l growth of 7.4% on a comparative in Q318 of 3.2%). Year to date, total sales growth is 13.4% and l-f-l sales growth is 9.2%. The company continues to benefit from increased footfall, as consumers are attracted to the new product introductions. Operating costs were described as ‘well controlled’.
We have upgraded our assumptions for FY19 to take account of the improved sales growth so far in Q419. We now assume l-f-l sales growth of 8.6% for FY19 versus 7.9% previously. Following l-f-l growth of 10.5% in H119 and 7.4% in Q319, we assume growth for Q419 of c 6%, a slowdown from the 8.3% reported so far. In Q418, Greggs’ l-f-l growth was 5.2%, therefore the comparatives become stronger for the rest of Q419. We make no changes to our gross margin and operating cost assumptions. For FY20, our forecasts are based on 2% l-f-l sales growth, but now we moderate our expected improvement in gross margin in H220 to increase by 20bp from 50bp previously given the pork price inflation may continue. Our PBT forecasts for FY19 and FY20 increase by 4.6% and 2.8% respectively.
The shares have underperformed the stock market over the last three months, given a lack of upgrades (following four consecutive upgrades) and concerns about how the company would trade against tougher comparatives in H219, which has been robust. On our new forecasts, the P/E is 23.5x for FY19 and 21.9x for FY20. Our DCF-based valuation increases to 2,091p from 2,028p, which was updated at the interim results.