Yesterday was a busy start to the week for those invested in Greggs (LSE:GRG). A trading update for 2021 so far was positive. The Greggs share price rallied above 2,700p around lunchtime, a gain of over 15%. Although it couldn’t hold on to these gains in the afternoon, it still finished easily in the green for the day. Do the optimistic outlook and results merit me buying the stock?
Results from the trading update
In the 18 weeks of trading through to the beginning of May, Greggs saw sales fall 13.5% versus the same period in 2019. This is two years ago, and not the usual year-on-year comparison. Greggs has done this intentionally due to the impact of the pandemic on temporary store closures in 2020.
Versus 2019, sales were down, but the gap is narrowing. For example, in the eight weeks to the beginning of May, comparable sales were down only 3.9%. This is a more accurate time frame to look at things as lockdown started to ease within this period. For much of the start of this year, the UK was still in a tight lockdown.
The rebound in sales was clearly one reason for the jump in the Greggs share price. Investors were happy that recent performance is starting to move back in line with pre-Covid levels.
So far in 2021, Greggs has also opened 34 new stores. This brings the total to an impressive 2,101 stores currently in operation. The continued pursuit of growth via store expansion is another reason why I think investors pushed the Greggs share price higher yesterday.
The outlook for the Greggs share price
Before I give my outlook on the stock, here’s what the company itself said in the update. The board “now believes that profits are likely to be materially higher than its previous expectation, and could be around 2019 levels in the absence of further restrictions.”
On this basis, the market needs to adjust for a share price move higher, I feel. Some of this likely happened yesterday, but I think it will rally further as more confirmation information comes through in coming months.
I noted the “materially higher” comment as well, which is a very bullish statement to make. This gives me confidence the the board believe in the growth of the company. These are the people who know the business inside out, better than market analysts and better than me.
Of course, I would be naïve to simply believe and buy stocks whenever a company was optimistic about 2021 outlooks. In this case, I do see risks for Greggs (and the share price).
The company operates in an extremely competitive environment. The bakery and fast food space has many players. Both local independent stores and national operators are also trying to get a piece of the action. So Greggs needs to be wary of this and make sure that expansion is also coupled with retention of existing customers.
Further, simply opening more stores isn’t guaranteed to generate more money. New sites need to be opened selectively, rather than just to tick a box. And with more people working from home for the long term, foot traffic in towns and cities may be reduced.
But on balance, I’m considering buying Greggs shares now after this latest trading update.
