Greggs (LSE:GRG) as a business may not be as exciting as Tesla or Amazon in what it does. It also doesn’t offer high volatility like we’ve seen recently with Rolls-Royce or Cineworld shares. But at the same time, Greggs shares are up almost 50% over the past year. So even despite the recent loss posted for 2020, I think it’s a stock that deserves attention, and one I’m looking to buy.
Looking past the losses
First up let’s deal with the negative 2020 results. After posting a profit in 2019 of £108.3m, 2020 accounts showed a loss of £13.7m. Full-year sales fell by over 30%, mostly due to store closures linked to the pandemic. Although the business has been able to reopen most stores under a controlled environment with reduced hours, the impact has still been clearly felt.
Personally, I don’t see the loss as a negative for Greggs shares as it’s not about company-specific steps that Greggs has taken. In fact, I think the business has managed the pandemic as best it could. It also focused on generating a positive cash position by the end of the year (which it did) and secured additional funding of £100m should it be needed.
It’s clear management agrees with me on this point. Instead of licking its wounds, the board is continuing to pursue a growth strategy. In fact, despite having to close some stores, Greggs opened 28 stores (net) during 2020. It’s planning on opening 150 during 2021.
A bright future for Greggs shares?
Another reason I’m positive on Greggs shares is because of the sector it operates in. The bakery/food-to-go retailer is a staple of the high street and one I don’t think will see a significant demand drop (under normal market conditions). The goods are reasonably priced, and appeal to a wide range of consumers. This broad client base will likely maintain demand despite the peaks and troughs of the UK economy. I’d therefore mark Greggs shares in the defensive stock category.
I’m glad to see it looking to increase its grip on the market by different initiatives. These include its range within supermarkets, and taking advantage of home deliveries. The willingness to expand into these new channels gives me optimism that the business will stay abreast of opportunities. In turn, this should be positive for Greggs shares.
The situation does look rosy, but there are always risks to consider. One I think the business needs to be aware of is the goal of store expansion. The vision is to get to 3,000 stores, with it currently sitting just above 2,000. But just opening stores for the goal of ticking the box could be damaging for Greggs. I’ve seen other businesses expand too quickly via physical locations, only to have to close them down. It’s better to take time to evaluate the benefit of a new store and profitability first.
And of course, we also have to take into account any changes in consumer behaviour with more people working from home post-pandemic.
Overall though, I think Greggs shares have a bright future. If the company remains focused on developing new channels and is mindful of not expanding too quickly, profitability should rise.
