From laughing stock to star stock, Greggs is in hot demand. Our head of equity strategy explains why.
The recovery in consumer stocks since Christmas, especially among the high street players, has been quite remarkable. Admittedly, many were oversold on fears that the festive period would not go well, but plenty are now hitting new highs. Greggs (LSE:GRG) is one of them.
Long lampooned as a baker of poor quality sausage rolls and not much else, the expensive turnaround at Greggs, begun five years ago, has been spectacular. Now, it still sells sausage rolls, but the stores are smarter and cater to a wider audience that demands low-calorie sandwiches and, more recently, vegan-friendly sausage rolls!
A profits warning last spring was blamed on cold weather - the Beast from the East – keeping shoppers indoors and out of its stores. The shares lost a third of their value, but first-half results in July implied a run-rate of about 2% like-for-like growth during May and June versus just 1.3% in the first 18 weeks of 2018.
That was the signal that Greggs shares had bottomed, and the buying began. They're up 89% since to a record high at 1,780p, and by 40% in 2019 already. Greggs is now the third-best performing stock in the FTSE 350 index since Christmas. Interesting to see another retailer – Dunelm (LSE:DNLM) – at the top of the pile with a 45% gain, and JD Sports (LSE:JD.) at number five, up 38%. Ted Baker (LSE:TED) shares are up 25%.
Source: TradingView (*) Past performance is not a guide to future performance
Buyers chased Greggs shares up as much as 11% Tuesday after hearing of an "exceptionally strong" start to 2019 and a third profits upgrade in as many months. Sales are up by 14.1% in the past seven weeks, or by 9.6% like-for-like at company-managed shops. In 2018, the weather-impacted numbers were just 6.2% and 2.9% respectively. It’s also much better than fourth quarter like-for-like growth of 5.2%.
Of course, publicity surrounding the launch of Greggs' vegan-friendly sausage roll, generated by a clever in-house marketing department, was a significant driver of sales, although we don’t have the hard data.
Even though the pace of growth has eased off in February, such a great start to the year will have a “material impact on the first half result”, and profits in 2019 are now expected to be higher than expected. We’ll get further information at the 2018 results announcement on 7 March.
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UBS has upgraded its price target for Greggs shares from 1,600p to 1,725p and, given easy comparatives, believes momentum will continue at least through the remainder of the first half.
Its pre-tax profit estimate for 2019 increases by 11% to £105.3 million from £94.9 million previously, "reflecting the strong operational leverage in the group, offset in part by the expected increase in costs from performance plans and profit share schemes".
*Horizontal lines on charts represent levels of previous technical support and resistance.
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