Despite the many challenges facing businesses this year, Greggs’ third quarter earnings results reveal robust demand, indicating a resiliency against rising costs and tightening consumer budgets. While signs point to growth, momentum may still wind down.
The Greggs [GRG.L] share price jumped 10.3% on 4 October after reporting a significant year-over-year increase in sales during the third quarter off the back of new store openings.
The UK bakery chain also released an upbeat note on expansion plans and guidance for the remainder of the year. The positive outlook saw the stock top the FTSE 350 risers’ list for the day.
The upbeat sentiment is in contrast to the general mood among British investors, with the FTSE 100 down 4.5% so far this year (through 5 October). The stock has fallen 41.3% over the same period.
However, Greggs’ underperformance relative to the index highlights its particular exposure to the inflationary fallout of the UK’s economic situation. On the one hand, margins have been squeezed by rising energy prices. At the same time, fears of a recession could soon hit footfall, with consumers tightening their budgets.
Q3 sales rise year-over-year
The 4 October update follows interim results in August that suggested Greggs may be weathering the storm better than onlookers expected, with the Greggs share price rising 2.6% on 2 August in response to a 27.15% increase in revenue year-over-year.
The top-line result for Greggs in Q3 is an encouraging 14.6% increase in total sales for the 13 weeks to 1 October. Coupled with a 9.7% year-over-year increase in like-for-like sales, the update paints an encouraging picture.
That said, the results suggest a slowing in momentum compared to the 27.1% increase in sales reported in the interim results last August. Mitigating factors, on this front, include a slowdown in growth in August compared to the strong “staycation” effect witnessed last year.
Demand is also expected to be impacted by the closure of sites on 19 September following the death of Queen Elizabeth II. The report estimated that closures impacted sales growth by “around one percentage point”.
Vegan menu expansion as new store opens
Expansion was a key indicator for investors ahead of these results, both in terms of Greggs’ product offerings and its store numbers.
For the former, the update reports a broadening of the company’s vegan menu as well as the rollout of its autumn menu. Pizza meal deals are reported to be popular especially with the strategically important evening daypart, and a new automated pizza line at Greggs’ Enfield site “will support further growth in this important category”.
Additionally, the update reports 90 net store openings for 2022 to date. Given the 70 reported in the interim results, this implies 20 net openings in Q3. The report states that Greggs is on track for its target of 150 net store openings in 2022, though the rate will clearly need to increase substantially in Q4 for this target to be achieved.
Despite “considerable uncertainty in the economy as a whole,” Greggs management expects “the full year outcome to be in line with [its] previous expectations.”
Positive guidance and analyst optimism
Investors will be encouraged by signs that Greggs appears to be on top of the inflationary pressures looking over the wider economy.
“The outlook for cost inflation for the year remains consistent with our previous guidance of c.9% overall,” the update states. Greggs holds “an appropriate level of forward purchasing cover,” as well as “significant energy cover for the first quarter of 2023, with average costs expected to be below the level of the recently-announced price cap.”
Eleven analysts polled by the Financial Times give Greggs an ‘outperform’ consensus, with two rating the stock a ‘buy’, six rating it an ‘outperform’ and three as a ‘hold’. However, these recommendations haven’t been updated since the Q3 trading update’s release.
Among 10 analysts offering 12-month price targets polled by the Financial Times, the median target of 3,125p represents a 41% increase from the 5 October close The low target of 1,800 would see the Greggs share price falling 2.2%, while the high target of 3,845p would mean a rise of 108.85% over the stock’s previous close, and an upside of 22.6% on the share price at the start of this year.
Disclaimer Past performance is not a reliable indicator of future results.
CMC Markets is an execution-only service provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.
The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although we are not specifically prevented from dealing before providing this material, we do not seek to take advantage of the material prior to its dissemination.
CMC Markets does not endorse or offer opinion on the trading strategies used by the author. Their trading strategies do not guarantee any return and CMC Markets shall not be held responsible for any loss that you may incur, either directly or indirectly, arising from any investment based on any information contained herein.
*Tax treatment depends on individual circumstances and can change or may differ in a jurisdiction other than the UK.