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 has traded well in Q4 with managed-store LFL sales up 3.0% against a tough prior year comparison base of 6.4%. In the year to December, total sales grew by 7.4% and LFL sales by 3.7%. The company has confirmed that it expects to meet management expectations for full year profits. Greggs’ strong Q4 showing comes despite difficult market conditions; market data showed a decline in high street footfall in December of 3.5% reflecting a trend for increasing online Christmas shopping.
Greggs is well placed to maintain control of its own destiny. The company converted 132 stores to its ‘bakery food-on-the-go’ format, a further 7% of the portfolio. The new stock management system is bedding down well with the high stock levels seen earlier in the year from the ramp-up now beginning to ease. Investment continues in the supply chain to grow further capacity and bring in more automation in the company’s plants. We believe that Greggs will be able to deliver significant costs savings beyond our forecast period, which should enhance margins rather than simply being used to maintain the company’s competitive position.
Greggs is beginning to annualise higher levels of food and packaging costs following the roll-off of currency hedges at the end of 2016. Levels of inflation in these areas will ease through 2018. While labour cost inflation will remain a factor, the company is confident in solid margin growth in 2018.
With management anticipating 2017 results in line with its previous expectations we retain our forecasts and our valuation of 1,226p per share.
