Earnings: Greggs is a company with big ambitions and lagging profits

Why Greggs shares may see volatility ahead although the longer growth story is intact and presents an opportunity for investors.

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Greggs (LSE: GRG) shares held steady this morning when the food-on-the-go retailer released its preliminary full-year results report.

With the share price near 2,731p, the FTSE 250 company has a market capitalisation of around £2.81bn. But this is a business run by directors with big ambitions. And if the firm’s expansion plans go well, the company may one day grow large enough to take up a position in the FTSE 100.

Investing for growth

However, my guess is it will take years rather than months before a promotion like that may happen. But I see the stock as a decent contender for a place in a long-term diversified portfolio aiming for growth and income. 

Meanwhile, revenue looks set to rise this year but profits will likely lag. And part of the problem is that businesses need to reinvest money to support expansion. The company said today that its supply chain investments are laying the foundations for the next phase of growth.

Last week I observed that the Greggs’ share price looks like it’s “up with events”. And that’s because much of what’s in today’s report had been presented in the fourth-quarter update on 5 January. But on top of that, the stock has risen by more than 50% since last October. 

So it’s perhaps unsurprising to find a full valuation. The forward-looking price-to-earnings multiple for the current trading year to January 2024 is just below 23. And City analysts have pencilled in an increase in earnings of around 2%. Therefore, Greggs doesn’t look like a high growth proposition in the short term.

I said in last week’s article: “My guess is it will take a robust outlook statement next week to push the stock higher.”

Targeting more than 3,000 shops

And chief executive Roisin Currie said in today’s report that Greggs started 2023 well. Like-for-like sales in company-managed shops grew by almost 19% in the first nine weeks of the trading year. And that outcome was “in line” with the directors’ expectations. However, it would probably have taken an ‘ahead of expectations’ statement to move the share price up today.

Furthermore, the sales figure compares to a suppressed period a year ago because of the Omicron variant of the coronavirus. And looking ahead, Currie said cost inflation will continue to be a challenge in the coming year. The main drivers will likely be pay awards and energy costs. But Currie is “confident” in the prospects for the business in 2023.

And looking beyond the current period, there’s an “exciting” and “ambitious” plan for the years ahead. Currie believes the business is “extremely well-placed to realise the opportunity to become a significantly larger, multi-channel business”.

Greggs opened a net 147 new shops in 2022, taking the total to 2,328 by the end of the year. And the target for 2023 is 150 new openings. But the directors reckon there’s an opportunity to achieve “significantly more” than 3,000 UK shops over time.

In summary, I think the longer-term growth story is intact. But the valuation may lead to share price volatility in the short term.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Kevin Godbold has positions in Greggs Plc. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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