Greggs’ (LSE:GRG) shares are down 25% over the past 12 months, but gained on Tuesday morning after the earnings update. The high street baked goods producer said that its value offer was attractive in a market where consumer incomes were under pressure.
So let’s take a look at Greggs and see whether this stock is right for my portfolio?
Performance
On Tuesday, Greggs said that total sales for the 26 weeks to 2 July were up 27.1% year-on-year to £694.5m. However, pre-tax profits remained flat at £55.8m amid the re-introduction of business rates, an increase in VAT and rising inflation.
“We have worked hard to mitigate the impact of cost inflation on customers but some further small price increases have been necessary; these appear not to have impacted transaction numbers,” the company said.
Greggs said that inflation increased significantly in the first half of the year. It now expects cost inflation of 9% for the year.
The company highlighted that its low-cost offer was popular with customers amid the cost of living crisis. However, it is clear that as inflation puts increasing pressures on the business, the company will have to push sales hard just to maintain the current level of profitability.
Outlook
Greggs is an immensely popular high street brand and, fortunately for me, it’s got a good range of non-meat options. It’s also well-represented on delivery apps, meaning I can get hold of a Greggs vegan sausage roll even though the closest shop is some distance away.
It’s brand reputation gives it defensive qualities that will likely serve well during an economic downturn, and that’s what we’ve been forecast.
And I appreciate that it’s an increasingly attractive option to households who are running short on cash right now. The vegan sausage roll costs £1.25 and provides 311 calories.
People might delay big ticket purchases such as houses and cars, but customers will continue buying cheap sausage rolls from Greggs because it’s a friendly British brand… and its cheap.
So, because of these factors, I’ve been keeping a close eye on Greggs.
However, in the long run, Greggs’ unhealthy food offering concerns me. Boris Johnson’s government U-turned on banning fast food adverts in February, but in the coming years there will be increasing pressure to move away from cheap, calorie-intense, nutritionally-sparse foods.
In fact, there needs to be. On average, Britons are vastly overweight and the burden of healthcare will be too much unless trends are reversed. It might not just be advertising bans, but maybe a fat tax that would hit fast food brands, which typically have small margins, hard.
Moreover, Greggs shares aren’t cheap. It has a price-to-earnings ratio of 18 which, considering the generally low valuations on the index, doesn’t look like great value.
So while I’m tempted by the short-term outlook for Greggs, which I see as largely positive, in the long run I contend that fast food will slowly become a thing of the past. So, as a long-term investor, I won’t be buying Greggs shares.
