Towards the end of the last month, I suggested the Greggs (LSE: GRG) share price was ready to push higher. Today, it’s done just that. Here’s why the FTSE 250 baker is back in demand.
Perhaps unsurprisingly, Greggs revealed it had seen a “strong recovery” in sales since Boris Johnson began lifting coronavirus-related restrictions. Indeed, total sales over the 18 weeks to 8 May were comparable to those seen over the same period in 2019 (£352m vs £373m respectively). They were also far better than the £280m in 2020.
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In the eight weeks to the 8 May, like-for-like sales were down 3.9% compared to the same period in 2019. However, this is clearly far better than the -23.3% seen in the 10 weeks to 13 March. While these numbers are only related to company-owned shops, Greggs is clearly rising to the occasion. In fact, like-for-like growth has been positive since high streets re-opened on 12 April.
The company is also expanding. In line with its plan to continue growing its estate in places where demand was solid, Greggs opened 34 new shops over the first 18 weeks of 2021. When the closure of 11 sites is factored in, the £2.4bn-cap boasts 2101 shops — the vast majority of which are company-managed.
In addition to this, Greggs has now implemented its delivery services in 800 of these units. Collectively, these have contributed just over 8% of sales over the last eight weeks.
As good as this news is, why is the Greggs share price up 8%? It’s mostly down to the positive comments from management regarding the company’s outlook.
Greggs now expects sales for its current financial year to be better than expected. This is assuming, of course, that Johnson’s roadmap continues to be implemented as planned. As a result, profits are now predicted to be “materially higher” than previously thought, and back to 2019 levels.
This is clearly a better scenario than the market expected and goes some way to demonstrating how big a role psychology can play in making money from shares. Buying a stock when expectations are low rather than high is always something I try to do.
Reasons to be wary
As a holder of the stock, I’m clearly biased when it comes to Greggs. As such, I think it’s important to consider the flip-side to its investment case.
Naturally, there will come a time when all the positive news is baked in. As the company stated today, it’s tricky to guide on profits given just how uncertain trading conditions are. News that many top employers will be changing their working practices going forward could impact on sentiment surrounding the stock. Even though the sausage roll-seller is concentrating on building shops in retail parks and petrol stations.
Even if workers return en masse, their desire to sit and eat on-site when restrictions are lifted could play into competitors’ hands. On top of this, the possibility (however faint) that new variants of the coronavirus could still disrupt operations shouldn’t be ignored. As an investor, it pays not to be too confident.
Despite these concerns, I’m encouraged by the reaction to today’s figures. Along with a number of other stocks, I continue to regard Greggs as a great play on the ongoing recovery from the pandemic. I won’t be selling just yet.