Greggs shares crash, but sell-off could be overdone 

One of 2019's best performers, many think the share slump has created a value opportunity.

Now that the fuss over a vegan-friendly sausage roll has died down, it's starting to look like the recent spectacular rally for the Greggs (LSE:GRG) share price has run out of puff.

The shares peaked at a record 2,496p in July, only to have fallen 24% since then as investor worries over the unforgiving retail environment gathered pace. This was reflected in today's 9% share price fall to as low as 1,890p, after Greggs reported a slowdown in like-for-like sales growth to a still impressive 7.4% in the 13 weeks to September 28.

Even though this performance keeps the FTSE 250 company on track for full-year expectations, investors appear to be getting greedy after the trading momentum generated by the hugely popular meat-free sausage roll triggered a succession of profit upgrades in 2019.

At the height of this euphoria, Greggs shares were more than 90% higher than their starting point in January. With that year-to-date growth now back to nearer 50%, the recent de-rating of the shares to around 1,900p has prompted some in the City to highlight an attractive entry point.

Source: TradingView Past performance is not a guide to future performance

The stock is still valued at a chunky 25.5 times 2019 earnings, but Greggs is a cash generative company that boasts a strong track record of expansion and sales upgrades. It recently unveiled a 35p special dividend alongside an 11% hike in its interim dividend.

Investec Securities, for example, still has a price target of 2,620p, while analysts at UBS think the shares are worth 2,300p. Their optimism reflects the potential for Greggs to further enhance its trading performance through initiatives such as later store opening times or food deliveries.

Store openings also continue at a rapid pace, with the company expecting the net addition of 90 new outlets in 2019 as it continues to take the Greggs brand into new food-on-the-go locations and to increase its presence in travel and workplace catchments.

It passed the 2,000-store landmark in South Shields in August and now trades from a total of 2,009 sites, comprising 1,724 company-managed outlets and 285 franchised units predominately in transport locations.

The new additions meant total sales were up 12.4% in the most recent quarter, not far short of the 13.9% seen for 2019 as a whole. Year-on-year comparisons are toughening, but UBS continues to forecast like-for-like growth of 8% for this year and 10% across the past two years.

UBS analyst Heidi Richardson added: "We see current like-for-like growth as encouraging as it indicates strong momentum in the business, ahead of the new implementation of strategic initiatives."

While there's no guarantee that the nation's appetite for a meatless sausage roll will last, it's likely the January launch has had a longer lasting impact on people's perception of the brand.

The extraordinary level of social and general media coverage will also have attracted additional visits to shops and given Greggs more of an opportunity to showcase its new store appearance and product menu.

The frenzy has provided Greggs with the platform to accelerate other strategic initiatives that might otherwise not have happened so quickly. These include the extension of shop opening hours into the evening period and a range of other digital and marketing campaigns.

Greggs has also been encouraged by customer demand for its delivery service trials, while it develops the operational processes to service this channel. 

It also sought to reassure investors today about the potential impact of Brexit, with the company having built stocks of key ingredients and equipment that could be affected by disruption to the flow of goods into the UK. Input cost inflation is in line with previous guidance, with pressure on both labour and food costs.