We’ve had our fun with the Greggs (LSE: GRG) share price. Is it time to grow up and move on?
Greggs defied sceptics to become a national treasure, establishing itself as a fixture on every high street. It’s now popping up at railway stations and airports too, as the FTSE 250 group’s ambitious board looks to increase store numbers from 2,500 to 3,500.
The high street bakery chain has come a long way from its humble beginnings in 1951. The Greggs share price has come a long way too.
Investors took notice and sank their teeth into it. There’s a huge appetite for Greggs on the Fool website. It attracts more readers than articles on much bigger companies. That made me a little suspicious. Were investors getting carried away? Were they distracted by its brand rather than examining its investment prospects?
Can this FTSE 250 treasure still shine?
Greggs shares continued their upwards trajectory despite my doubts, but then I had a second worry. They were starting to look expensive. Trading at more 22 times earnings last year, I feared they were overvalued.
The first blow landed on 1 October. Q3 total sales rose 10.6% but that marked a drop from 13.8% in the first half.
This trend continued in the group’s latest trading update, published on 9 January. While full-year 2024 total sales jumped 11.3%, through £2bn for the first time, Q4 like-for-like sales growth slipped to a wafer-thin 2.5%. Greggs said this reflected “more subdued high street footfall”.
The board’s still pushing on, opening a record 226 new shops, while closing underperformers with an impressive lack of sentimentality. The net addition was 145 shops.
Greggs is now bracing for a double blow in April, when Budget hikes to employer’s National Insurance and the Minimum Wage will drive up workforce costs. Plenty of other retailers will share its pain. Greggs may be better placed to absorb it. The margin squeeze is priced in now. It’s a known risk.
However, as its recent update showed, consumers are feeling the pinch. They may even have to cut back on affordable treats like a trip to Greggs. With the Bank of England forecasting consumer price inflation will rebound to 3.7% in the summer, the cost-of-living crisis isn’t over yet.
Lower valuation, higher yield
Given these concerns, it’s reasonable to question whether the enthusiasm surrounding Greggs’ stock was overblown.
The shares have declined by 20% over the past 12 months. However, they now appear more attractively valued, trading at about 17 times earnings and offering a trailing dividend yield of 2.9%. This improved valuation may entice bargain hunters.
Greggs is showing resilience, innovation and adaptability by expanding its menu and trying out new snacks to compete with fast-food chains.
While Greggs faces significant challenges, its current valuation and bullish initiatives may present an opportunity. I understand why investors might consider buying them but personally, I won’t. For me, the fun’s gone.
