The Greggs (LSE: GRG) share price has gone cold. Until recently, investors couldn’t get enough of it, but now they appear to have lost their appetite.
Shares in the FTSE 250 bakery chain have plunged almost 50% in a year, a dramatic reversal after a sizzling run. And I’ll say it, I’m not surprised. The stock was generating so much heat that I began to wonder how long the cult of Greggs could last.
Britons stopped sneering at it’s cut-price steak bakes and sausage rolls some years ago, and embraced Greggs as a national treasure instead. The vegan sausage roll was a masterstroke, backed by cheeky marketing and good value meal deals. The chain’s rapid expansion made it hard to ignore.
Yet I looked at the stock several times last year and thought it looked a little overcooked. Greggs was trading on a price-to-earnings ratio of more than 22, which felt steep for a seller of cheap treats on struggling high streets.
Sales momentum fading
Cracks started to show last October when Greggs reported slower Q3 growth. In January, full-year sales broke £2bn for the first time, but growth had slowed again in Q4. With the board blaming the cold January weather for poor interims in March, I commented: “Even the British climate seems to be against Greggs these days,” and urged caution.
Full-year figures on 29 July showed the weather is still a problem. Pre-tax profit fell 14.3% to £63.5m in the 26 weeks to 28 June, despite total sales climbing 7% to £1.03bn. Like-for-like sales rose just 2.6% in company-owned stores and 4.8% in franchise outlets.
Management blamed weaker footfall, cost pressures and weather disruption and warned operating profit is likely to trail 2024’s level.
Turning this around won’t be easy, and I’m not completely convinced by the board’s strategy of opening more and more shops, as the UK already feels saturated with outlets. Expansion in travel hubs could help, but that’s a niche opportunity. Pushing further into supermarket freezer aisles and turmeric shots risks diluting the brand.
Valuation looks tempting
Yet Greggs has one big thing in its favour. The shares are now valued at a modest 10.55 times trailing earnings, half last year’s level. And here’s another. The dividend yield has more than doubled to 4.23%.
Better still, brokers are upbeat. Consensus forecasts reckon the shares could climb to 2,104p over the next year, implying a tasty 29% recovery from today’s 1,631p. A bounce after such a sharp sell-off is certainly possible.
Yet I remain cautious. Greggs risks overreaching, stretching itself in too many directions. To everything, there is a season. Its day in the sun could be over.
Should investors bite?
Greggs has been a terrific British success story, but the cost-of-living squeeze, softer footfall and shaky profits suggest the next stage will be harder. Plus I worry about the brand drifting from its roots.
At today’s lower valuation, investors might consider buying for income and the potential of a rebound. But success isn’t baked in.
