Greggs (LSE: GRG) is undoubtedly one of London’s greatest success stories. Over the past three years, shares in the high street sausage roll retailer have gained 93% as earnings per share have doubled from 30.8p at the end of 2013 to 62p for year-end 2016.
This trend looks set to continue as the company announced its results for the full year 2016 today, and all numbers were moving in the right direction.
Revenue for the year expanded 7% to £894m while operating profit from food sales grew 8.6% to £78m. 66 new shops were opened on a net basis during the year bringing the overall footprint to 1,764.
2017 has also got off to a good start. Management noted in today’s results release that company managed shop like-for-like sales have grown 2% percent in the eight weeks to 25 February 2017. Underlying company managed shop like-for-like sales in weeks two to eight of the year grew 2.9%.
However, while the figures for 2017 already appear to be moving in the direction, Greggs is cautious on the outlook for the rest of the year. Specifically, in today’s press release Roger Whiteside, Chief Executive warned:
“The UK consumer outlook is more challenging than we have seen in recent years, with industry-wide pressures emerging in commodities as well as labour costs.”
Well-positioned
Despite growing headwinds, I believe Greggs is better positioned to weather any turbulence than the likes of restaurant operators such as Restaurant Group (LSE: RTN).
Greggs has been refitting its store portfolio over the past year with a new ‘food to go’ layout, which requires less staff and offers customers a wider variety of products. In comparison, Restaurant Group still operates an extensive restaurant portfolio, which requires a large number of staff and will likely suffer more from higher business rates, minimum wages and rent costs than Greggs. There’s also the rising number of competing restaurant offerings to consider.
It seems competition is already having an impact on the group. At the end of January, the company reported a 3.9% decline in like-for-like sales for the 53 weeks to January 1.
Differing outlooks
With sales of both businesses moving in opposite directions, it is no surprise that city analysts hold divergent views for the two stocks.
For the year ending 31 December 2016, City analysts are expecting Restaurant Group’s earnings per share to fall a staggering 14%. Further declines are expected for 2017. Analysts have pencilled in a decrease in earnings per share of 23% for this period. On the other hand, analysts are expecting Greggs to report earnings growth of 1% for 2017 and 8% for 2018.
But despite Restaurant Group’s bleak outlook the shares still trade at a relatively demanding forward P/E multiple of 14.6 for 2017. Much of this valuation appears to be held up by the firm’s dividend yield, which currently stands at 5.1%. Despite this hefty payout, I’d rather buy Greggs due to the company’s steady growth profile.
