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 This result is significant and should help challenge out-of-date assumptions about Greggs.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.
Total revenue grew 7.3% y-o-y in Q3, an acceleration of growth against H1’s 5.2%. Similarly, managed store like-for-like sales growth was 3.2%, higher than Q2’s 1.8%, which in turn was higher than Q1’s 1.1%. Remarkably, the improvement in all three quarters’ like-for-like growth took place against increasingly strengthening comparative growth in the equivalent three quarters of 2017.
The scorching conditions of summer 2018 made many retailers modify their trading expectations. For Greggs they were a test, passed convincingly, of brand transformation on several dimensions: more food-on-the-go locations attracted new customers such as motorists; many customers in existing retail locations are now workers rather than shoppers; the brand has expanded into new dayparts such as breakfast and late afternoon, which were cooler; and menu development meant cold, lighter products were available.
The company is on course to meet expectations. The swing to lower-margin, bought-in products such as cold drinks and pasta salads during the heatwave depressed margins slightly. However, this was temporary and was countered by like-for-like sales, above our H2 forecast of 1.3%.
With no change to our forecast, we retain our valuation of 1,360p. This represents a 30% premium to the current share price. However, we believe this is justified on a blend of DCF and peer group analysis. The shares trade on a 15.3x 2019e P/E and 6.6x EV/EBITDA multiple. The latter represents a 37% discount to the peer group, which we do not believe is sustainable. We also note that it is a 60% discount to the 16.4x EBITDA based valuation at which Costa has been bought by Coca-Cola.