Greggs preliminary results are expected to deliver higher full-year profit than initially predicted. Will this allow the firm’s share price to keep growing in 2020?
British bakery chain Greggs [GRG] has been on the up-and-up since its hit product, the vegan sausage roll, was launched in 2018. In 2019, the chain’s share price delivered an 81% return, dwarfing the FTSE 100’s 12% increase that year.
This year is also looking strong for the company, although its share price has been temporarily hit by coronavirus fears – a factor which has wiped out millions in markets around the world. Up to 27 February, Greggs has lost 16.2% since an outbreak in Italy was reported over the weekend (22-23 February).
The share price may have the opportunity to pop back up on 3 March, when it reports preliminary results, after an update in January highlighted that the company is expecting higher full-year profit than initially predicted.
Peeling back Greggs’ Q4 trading update
Greggs’ January update offered a positive outlook for the near term after reporting a lift in total sales and company-managed shop like-for-like sales for the 2019 financial year.
Total sales for 2019 were up 13.5% compared to 2018, and shop like-for-like sales were up 9.2%. Greggs opened 138 new shops throughout the year, meaning that 2050 shops are now trading (300 of which are franchised) as of 28 December 2019. This gives it a bigger presence in the UK than chains such as McDonald’s [MCD] and Starbucks [SBUX].
The update opened with a “special thank you” to Greggs staff, who will receive £7m in special payments as a result of the company’s success. Even with this payment included, full-year underlying profit before tax is expected to be slightly higher than previous expectations and reported on 3 March.
Amount paid out by Greggs to staff due to company's success
The company did note that there will be a number of cost headwinds in the year ahead as a result of increases in both the National Living Wage and the price of pork. Greggs said it will seek “to mitigate as much of this as is possible through business efficacy”. There was no mention of the impact of the coronavirus, although it may have been too early in the virus’s lifespan to have been able to predict impact.
How much will coronavirus impact Greggs?
Since Italy’s coronavirus outbreak, markets around the world have seen the longest sustained drop in value since news of the virus was first reported at the end of December 2019. As of 27 February’s close, the S&P 500 was down 10.7%, the Dow Jones 11.6% and the Nasdaq 10.5% since the previous Friday.
As with all businesses, the effect the virus will have on Greggs’ performance is still unclear. However, the impact has already been seen across travel and service industries around the world, and if authorities in major world economies start shutting down facilities where large numbers of people congregate such as shopping malls and airports, the damage could prove broad and long-lasting, according to the New York Times.
For now, it’s important to remain alert to how governments are dealing with the outbreak. It’s also important to look out for the opportunity, as this may offer the chance to buy the dip in a stock like Greggs, which is currently priced on the higher side.
|PE ratio (TTM)||27.67|
|Quarterly Revenue Growth (YoY)||14.70%|
Greggs share price vitals, Yahoo Finance, 02 March 2020
Coronavirus aside, Greggs is regarded highly among share price investors who believe it to be a responsible and dependable company.
“The management team at Greggs have shown that not only are they able to spot emerging market trends (as with the recent rise in vegan food products), but also, they are capable of executing an effective strategy which responds to such market trends and satisfy the demands of consumers, delivering when it matters,” says Motley Fool writer Matthew Dumigan. “This ability is key to the success of any firm and the degree to which Greggs has accomplished this reflects a strong business model with great future prospects.”
“The management team at Greggs have shown that not only are they able to spot emerging market trends (as with the recent rise in vegan food products), but also, they are capable of executing an effective strategy which responds to such market trends and satisfy the demands of consumers, delivering when it matters” - Motley Fool writer Matthew Dumigan
For this reason, Dumigan believes the company has plenty of room to grow and expand despite its high share price, which stands at a price-to-earnings ratio of 33.73%.
From the same publication, Karl Loomes says that Greggs’ ability to adapt to the times, recently tying up with Just Eat so that its products could be on offer for delivery, ensures the company is likely to have success for the long-term.