ii view: Greggs shares rally after confirming robust trading

Shares in this value food-on-the-go chain have underperformed the FTSE 250 index year-to-date, but things may be looking up. Buy, sell, or hold? 

Third-quarter trading update to 1 October

• Total sales up 14.6% year-over-year
• Company-managed shop like-for-like sales up 9.7%

Guidance:

• Expects the full year to be in line with previous management expectations

ii round-up:

Bakery and food outlet operator Greggs (LSE:GRG) today reported same store sales growth of 9.7% for the third quarter to the start of October. 

That’s down from growth of 11.2% in the prior second quarter, but ahead of City forecasts and takes account of both tough Covid-19 fuelled 2021 comparatives and the closing of stores for the Queen’s funeral. It also leaves the FTSE 250 company on track to meet management’s full-year forecast. 

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Gregg shares rose by more than 10% in UK trading having come into this latest announcement down by about half year-to-date. Shares for fellow specialist retailers Currys (LSE:CURY) and Dunelm Group (LSE:DNLM) are down by a similar amount. Meanwhile, supermarket chain Sainsbury (J) (LSE:SBRY) is down by a third and the FTSE 250 index has fallen by close to a quarter.

Total Gregg sales and including a net new 90 store openings year-to-date rose by 14.6%. It continues to target around 150 net new stores in the current year. 

Newly opened outlets included two 'drive thru' sites in Amesbury and Durham and railway locations at Tottenham Hale and London's Liverpool Street Station. It also recently commissioned a new automated pizza manufacturing operation in North London which will help to lower costs in this now important product category. 

Broker UBS reiterated its ‘buy’ stance on the shares following the update, summarising the quarterly performance as ‘strong.’

ii view:

The Newcastle headquartered company began a transformation from bakery to food-on-the-go retailer in 2013. Today, its products are now predominantly made in centralised bakeries. Its 2,271 outlets are located from high streets to industrial parks. Digital technology is central in its strategy, with a reward offer, click and collect, and home delivery service partnered with Just Eat.

For investors, elevated cost pressures including those for food ingredients and energy because of its own facilities produce the sausage rolls and pasties, cannot be ignored. Previous challenges from the pandemic have also now been replaced by economic uncertainty, and the impact this could have on the propensity for its customers to spend money at its outlets. 

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On the upside, there's a focus on costs, with expected input inflation of 9% for the year staying the same and energy needs being covered into the first quarter of 2023. The opening of new stores is ongoing, while its value proposition at a time of economic turbulence and uncertainty may mean it is favoured by cost conscious consumers. 

On balance, and with the consensus analyst estimate of fair value sat at around £30 per share, the shares may interest optimistic investors with an eye on the long term.

Positives: 

• Value product offering
• Opening new stores 

Negatives:

• Cost headwinds
• Uncertainty economic outlook

The average rating of stock market analysts:

Buy