Greggs enjoys a differentiated position in the growing food-to-go market. Its strategy to enhance its offer and improve the efficiency with which it delivers that offer has yielded good results so far and remains on track. Although the industry faces input cost headwinds in FY17, Greggs has the financial strength to withstand them and the benefit of the continuing strategic initiatives to offset them.
With one quarter to go, Greggs is confident that it is on target to meet full-year expectations for FY16. We have therefore left our FY16 estimates unchanged. In the 13 weeks to 1 October 2016 total sales grew by 5.6% (2015: 5.0%) and like-forlike sales in company-managed shops increased by 2.8% (2015: 4.9%), in line with management’s expectations. Total sales have grown by 5.6% in the year-to-date and like-for-like sales have increased by 3.4%.
Management has highlighted pressure on certain commodity prices and the impact of the decline in sterling’s value as probable headwinds in FY17. Clearly Greggs and the industry generally will work to offset these pressures. Nevertheless, we acknowledge the further decline in sterling since we last wrote by reducing our FY17 gross margin assumption by 40bps and our PBT forecast by £4m.
The combination of a higher discount rate, lower FY17 gross margin assumption and faster net new store openings for the foreseeable future results in an immaterial 10p increase in our DCF valuation of Greggs from 1,179p to 1,189p. On our estimates, at 1,189p, the shares would trade on an FY16e P/E of 19.8x, which would fall to 19.1x in FY17e. The respective dividend yields would be 2.5% and 2.6%. At the end of FY15, Greggs reported net cash of c £43m and we expect a very similar level at the end of FY16. On an EV/EBITDA basis, the ratios for this year and next at today’s share price are 8.0x and 7.6x, respectively. At 1,189p, those ratios would be 10.0x and 9.5x.