For FY19, Greggs reported l-f-l sales growth of 9.2% and the gross margin increased by 100bp to 64.7% (despite increased COGS inflation) as it benefited from strong volume growth and the ongoing transformation investment in infrastructure. The operating margin increased by 160bp, while funding additional performance-based bonuses for staff and investment in initiatives that should drive future growth. DPS for the year increased by 25.8%, and management is considering another special dividend at the time of the H120 results, following a special dividend of 35p with the H119 results. Cash generation was strong, with a year-end net cash position of £91.3m versus £88.2m at the end of FY18.

With l-f-l growth of 7.5%, despite February being affected by poor weather, the trading statement for the first nine weeks of FY20 is strong against the comparative seven weeks of FY19 of 9.6% l-f-l growth. It provides confidence that the strategy is capable of delivering further growth as comparatives get tougher through FY20. We increase our assumption for l-f-l growth in FY20 from 2% to 5%. We assume the gross margin falls by 160bp to reflect greater food input inflation and staff cost inflation, which cannot be offset by the traditional levers of efficiencies and pricing. For FY21, we assume 2% l-f-l growth and no gross margin improvement. Our PBT forecast for FY20 increases by 2%, growth of 6% y-o-y, and our forecasts for FY21 generate 6% PBT growth. We assume a higher effective tax rate of 20.5% in both years.

On our new forecasts, the 2020e P/E is 22.4x. Following the upgrade to forecasts and rolling forward our assumptions, our DCF-based valuation increases by c 4% to 2,188p from 2,096p