ii view: Greggs grows as app and evening sales provide boost

Third-quarter trading update to 30 September

• Company-managed shop like-for-like sales up 14.2%
• Total sales up 20.8% 
• Full-year guidance left unchanged

ii round-up:

UK food-on-the-go retailer Greggs (LSE:GRG) today detailed third-quarter sales in line with City expectations, as it left its full-year profit hopes unchanged despite flagging strong fourth-quarter comparatives ahead.

Same store sales at its 1,928 managed outlets rose 14.2% year-over-year, buoyed by increased sales during the evening or after 4pm and growing use of its Greggs App. Total sales including its 428 franchised stores climbed by just over a fifth during the quarter. 

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Shares in the FTSE 250 company drifted 3% lower in afternoon UK trading having come into this latest news up 44% over the last year. That’s similar to supermarket Sainsbury (J) (LSE:SBRY) and in contrast to a one-quarter fall for food delivery provider Just Eat Takeaway.com NV (LSE:JET). The FTSE 250 index itself is up 3% over that time.

Greggs has opened a net new 82 shops so far this year, with full-year management expectations reduced marginally to between 135 and 145 net new outlets from previous guidance of 150 stores. 

Evening sales accounted for 8.8% of its company-managed shop sales during the quarter, up from 8.3% in the first half. App related sales on the same basis rose to 13.1% from the prior half’s 10.6%.

Following trials, Uber Eats is now being added as a second delivery partner to sit alongside Just Eat.

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A fourth production line is soon to start in Newcastle, adding further manufacturing capacity towards its savoury bakes and rolls, with work also progressing to expand distribution centres in Birmingham and Amesbury.

Broker UBS reiterated its ‘buy’ rating on the shares post the announcement. A fourth-quarter trading update is likely early January. 

ii view:

Founded in 1939, Greggs today employs over 28,000 people. Headquartered in Newcastle, it predominantly makes its own products in centralised bakeries. Group strategy includes growing its store portfolio over time to a potential 3,000 UK stores, increasing its digital related sales such as click & collect and delivery and expanding its opening hours into the evening.  

For investors, the tough economic backdrop for customers including heightened interest rates should not be ignored. Costs generally for businesses remain elevated, while other food-on-the-go companies including the McDonald's Corp (NYSE:MCD) are not standing still. 

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More favourably, store numbers are growing, with hopes persisting that Greggs may revisit its previously failed move overseas, while costs for things like food ingredients are easing. A focus on product categories such as pizza and chicken goujons is being helped along by both extended opening hours and its digital initiatives, while its value proposition at a time of economic challenge should leave it more favoured by cost conscious consumers.

For now, and with the consensus analyst estimate of fair value standing at close to £32 per share, longer-term optimism in the City at least looks to remain.   

Positives: 

• Value product offering
• Opening new stores 

Negatives:

• Uncertainty economic outlook
• Elevated costs

The average rating of stock market analysts:

Buy