An unscheduled trading update confirming exceptional 11.1% like-for-like (l-f-l) sales growth in the first 19 weeks of FY19, and a fourth earnings upgrade in six months is testament to Greggs’ outstanding progress on the repositioning of the brand as a leading food-on-the go-format. We increase our FY19 and FY20 underlying PBT forecasts by 9%. The company is highly cash generative and likely to distribute part of the substantial cash balance (FY19e: £102.6m) with the H119 dividend.
Greggs has delivered exceptional 11.1% like-for-like sales growth in the first 19 weeks of FY19, a further improvement on impressive growth of 9.6% in the first seven weeks of the year. This builds on a strong finish to FY18, which saw overall Q4 like-for-like sales growth of 5.2% strengthening to c 6–7% in the final weeks. Sales have been boosted by the phenomenal success of the vegan-friendly sausage roll, which has been made more widely available across all stores, and ongoing strong demand for hot drinks and breakfast ranges and the post-4pm pizza deal.
Greggs remains on track with strategic investments in the supply chain and IT systems, and the vision for brand repositioning continues to evolve apace. Given the strength of trading, management intends to accelerate investment in strategic initiatives in H2, including a significant opportunity to extend opening hours beyond the traditional breakfast and lunchtime dayparts, into the early evening.
We upgrade our FY19 and FY20 underlying PBT forecasts by 9%. Based on current trends, we raise our H1and H2 l-f-l sales growth assumptions to 9.5% and 5% (previously 6% and 1%) in the current year, offset in part by investment in strategic initiatives, including higher spending on labour and digital marketing, in H2. We make no changes to our FY20 underlying assumptions, including 2% l-f-l sales growth, at this stage.
Greggs’ shares trade marginally below our updated DCF valuation of 2,059p (previously 1,897p), which assumes revenue growth beyond FY21e of 6% cautiously fading to 2% and a perpetuity EBITDA margin of 16% (2021e:15.1%). The company is highly cash generative and is expected to distribute surplus cash in excess of £40m (FY19e: £102.6m) in the form of a special dividend in addition to the H119 dividend.