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%.
Q418 company-managed store lfl sales rose by 5.2%, implying growth of approximately 6.3% over the final five weeks compared with a reported increase of 4.5% over the first eight weeks of the quarter. This follows a solid Q318 increase of 3.2% and marks the 21st consecutive quarter of lfl sales growth for the company; an enviable record in the current climate. Although travel and work-related locations generally delivered the highest lfl sales growth, the strong performance was broad based, a testament to the ongoing transformation of the brand.
Although Greggs does not invest in above-the-line advertising, it does use social media marketing and is very successful in generating waves of positive publicity around innovative new products to draw new customers into the stores – the recently launched vegan sausage roll to complement ‘Veganuary’ being an example. New IT systems, implemented in 2017, are starting to deliver marked improvements in replenishment and the speed at which customers are served.
We upgrade both our FY18 and FY19 PBT by 3% to £89.2m and £95.2m, respectively. In FY19 we conservatively forecast 2% lfl sales growth, with a stronger H1 vs H2 against softer comparatives (assuming no repeat of the extreme weather patterns that dominated the first half of 2018), and 5.6% growth from new stores.
As a result of the sector de-rating, our blended DCF and peer-group valuation remains broadly unchanged at 1,517p. This implies an FY19e P/E multiple of 20.3x, which does not appear stretched given the quality of earnings and dividend yield.