Following the end of lockdowns in 2020, Greggs‘ (LSE:GRG) shares proceeded to go on a rampage. A combination of excess savings and pent-up demand allowed the sausage roll baker to enjoy a flood of new sales volumes. Management then proceeded to use this newfound wealth to accelerate the expansion of its location network, and what followed was a near-tripling of its share price within just over a year!
Skip ahead to 2025, and the story seems to be quite different. The once-beloved FTSE 250 stock has seen its market-cap crash multiple times since January, resulting in a 40% loss for anyone who decided to top up their position.
As a result of this downward trajectory, much of the gains made in the last five years have subsequently been wiped out. And while anyone who bought £1,000 of shares in July 2020 has still made a gain, it’s only by around 9.3%, or a profit of £93.
So why’s the Greggs share price seemingly in freefall? And has this secretly created a buying opportunity?
Incoming margin pressure
The trouble started when Greggs suddenly suffered a massive slowdown in sales growth, both on a total and like-for-like basis and triggered a profit warning. To be fair to management, this wasn’t entirely within its control, given that high street discretionary retail shopping suffered in light of bad weather. And the firm did start to see a recovery emerge a few months later.
Sadly, this positive sentiment quickly vanished again as heatwaves hitting Britain didn’t exactly entice consumers to buy warm pastries. And consequently, management issued yet another profit warning. But is there more going on than just bad weather?
It seems that Greggs’ bottom line could soon be under fire, due to an incoming convergence of costs that have already begun impacting profit margins.
The increase in the National Living Wage and employer National Insurance contributions has resulted in a significant rise in staffing costs. At the same time, the price of raw ingredients is on the rise. And the firm’s also being slapped by higher self-inflicted capital expenditures revolving around its plans to open more locations while refurbishing old ones.
Needless to say, this isn’t good news. So it’s understandable why some investors are beginning to question whether management’s misread the market and needs to change strategies.
Room for optimism?
There’s no denying that Greggs’ shares are going through a rough patch right now. But, despite the headwinds, some positives could drive improved performance in the long run.
Investments in supply chain optimisation and manufacturing automation are expected to deliver greater efficiency gains while reducing the size of its required workforce. At the same time, the Greggs brand still holds a lot of sway over many households. And that’s proven to be a handy advantage of selling new, higher-margin offerings like its over-ice drinks.
That suggests in the medium-to-long term, the expected damage to profit margins could be reversed. And if growth can get back on track, Greggs may eventually emerge as a stronger business, propelling its shares back towards new heights.
Having said that, the near term remains shrouded in uncertainty. So I’m keeping this business on my watchlist until a clearer picture emerges of what’s going on under the bonnet.
