From the start of May, Greggs (LSE:GRG) shares have been faring pretty well, climbing an impressive 12.1%.
If an investor had put £10,000 into its shares at the time, their position would be worth £12,080 today. Therefore, they would have an unrealised profit of £2,080. That’s not bad at all for one month.
However, not all has been plain sailing for shareholders of the bakery chain. The company’s shares have fallen by 27.1% since the start of the year. A £10,000 investment then would only be worth £7,295 today. Not so pleasant.
So, let’s look at why this happened and what’s causing the recent optimism.
Rolling down a hill
Most of Gregg’s share price drop this year occurred in January, when it released its fourth-quarter trading update. Initially, its results appeared solid as sales were up 7.7% from the year-ago quarter.
Taking this information in isolation, this would appear as good news, however, it doesn’t paint the full picture. This is because most of this growth came from the opening of new stores.
Like-for-like sales from company-managed stores were only up 2.5%. Given that UK inflation was 2.5% in December 2024, this represents pretty much no real growth. As the bakery has seen a slowdown in growth from 2021, investors were clearly unhappy.
Then, in early March, the firm released an update for the first nine weeks of 2025. These were even more disappointing. Same-store sales growth fell to just 1.7%. This is well below the inflation rates of 3% and 2.8% in January and February, respectively.
The company pointed to subdued high street footfall and adverse weather conditions for its growth stagnation.
Positives
After Greggs’ share price fell from its trading update in March, the shares have been marching upward. There doesn’t appear to be any news that’s causing it, so I believe it’s because investors think it’s become a good buying opportunity.
It’s also worth pointing out that the company now has a pretty attractive dividend yield of 3.4%. This makes it a decent passive income opportunity for investors to consider.
Furthermore, the bakery released another trading update (20 May) recently on the performance of the first 20 weeks of 2025. This was much better, with same-store sales up 2.9% on the back of overall sales growth of 7.4%. Therefore, this may be an indication that the firm may be experiencing stronger growth soon.
Now what?
All things considered, I think investors should consider avoiding Greggs’ shares right now. That’s because even though its same-store sales growth is back on the up, it’s still below inflation, which was 3.5% in April.
Same-store sales growth is important for the company because there’s only so much growth it can achieve through opening new stores, especially as it already has a very large footprint in the UK of 2,638 shops. There’s only so much more it can expand.
Moreover, I’m worried about inflation, which is back on the rise. This could hurt the business’s real growth. The firm itself expects cost inflation to be 6% on a like-for-like basis. Therefore, its margins may fall.
The firm needs to pick up growth again, at least to the point where it’s outpacing cost inflation, before I’d say its shares are worth considering again.
