Greggs’ management has been open in recognising that despite the Beast from the East and other extraordinary weather patterns, there is an underlying softening of demand. We have reduced forecasts, but see earnings growth continuing from a combination of like-for-like sales, shop expansion, and investment in the estate and manufacturing and fulfilment infrastructure. Greggs’ value positioning should place it well in a tight consumer market, and at these levels the valuation is attractive.
Eighteen-week sales were +4.7% year-on-year, and managed like-for-like sales +1.3%. Against +6.2% and +3.2% respectively at eight weeks, that implies intervening declines, with lower transaction numbers despite higher average spend. It is no surprise that extreme March and April conditions affected trading, with footfall down across the retail sector. Management estimates that weather affected the period by up to 1%, implying that ex-weather, like-for-like growth would have been c 2%. That is not a bad result, although it does imply some overall demand flattening.
Like-for-like sales are back in growth in the first days of May, and the strategy is on track. Net openings of 29 stores are comparable with the 28 at 19 weeks last year, although the back-ended openings phasing is likely to be more pronounced in 2018. The manufacturing consolidation process is going to plan.
Management is now more cautious in its outlook, and we reduce our forecast likefor-like sales growth assumption for H218 from 1% to 0.5%. We also cut our net openings forecast from 120 to 110 with later phasing. Our 2018 PBT forecast of £81.9m represents a 4% downgrade. In 2019 we soften forecast like-for-like sales growth from 2% to 1.5% which, on the lower base for a full year, means that we downgrade PBT by 8%. By 2020 we forecast a return to more normal PBT growth of 8%.
Our blended valuation of 1,360p is around c 5% down on our previous 1,436p, with reductions in our DCF valuation compensated by increases in the market rating of peers since March 2018. It is notable that Greggs trades on a 2019e EV/EBITDA multiple of only 6.6x, compared with peers at 11.6x, a level of discount that looks unsustainable for any length of time. Meanwhile, 2018 year-end net cash, which we forecast at £35.7m, underpins the 3% yield.