2025 was a rough year for Greggs (LSE:GRG) shares, with the British bakery chain seeing close to 40% of its market cap wiped out. And with this downward trajectory continuing into 2026, even after dividends, a £5,000 investment at the start of last year is now only worth roughly £3,028.
That’s obviously a painful loss. But with the dividend yield now at 4.2% and the price-to-earnings (P/E) ratio sitting at just 11.5, could a secret buying opportunity have potentially emerged?
How did we get here?
Despite what the large drop in its share price suggests, Greggs’ actual business hasn’t imploded. While profits have come under some pressure, sales have remained relatively resilient. Instead, the main issue is that growth stalled.
A combination of poor weather conditions, sudden cost inflation for wages and raw ingredients, along with conditioned investments into expanding capacity, squeezed operating margins.
Management has been able to offset some of this pressure through price hikes. However, Greggs’ reputation as a cheap-and-cheerful on-the-go food retailer has limited this flexibility, especially in the currently subdued UK economic environment.
As such, with the slowdown of like-for-like sales, investors grew concerned that the little growth which remained was actually being driven by new store openings rather than actual demand. And consequently, the shares were re-rated from a quality-growth to a steady-mature stock, dragging down the share price.
A potential rebound?
As of January 2026, Greggs is the most heavily shorted company on the London Stock Exchange. But should it start delivering stronger results, the unwinding of these short positions could translate into a powerful rally. And a lot of the recent headwinds do look temporary.
While somewhat random, improved weather conditions at the start of 2026 could help deliver some nice year-on-year results. At the same time, the continued moderation of inflation combined with real wage growth supports higher discretionary consumer spending and lower ingredient costs.
Furthermore, with Greggs’ capital investments into its supply chain and digital infrastructure now past its peak, operating margins could start to widen towards the end of 2026 into 2027. And it’s worth pointing out that in its latest guidance, the group expects its net cash generation to return to positive territory this year.
What to watch
A large short position with potential growth catalysts does set the stage for a share price rally. However, it’s far from a guaranteed outcome.
With Greggs stores already set up in regions of the country with the highest density of population, new Greggs locations may struggle to deliver similar unit economics.
Furthermore, while falling inflation does bode well for production costs, wages remain a challenge with yet another increase in the minimum wage coming in April this year. Don’t forget, the bakery chain has over 32,000 employees.
Its ongoing pilot scheme with its new self-service kiosks may help address this challenge. But rolling this out to all Greggs locations, once again, ramps up capital expenditures in the short term.
So, what’s the verdict? I think there’s still a lot to like about this business. But with plenty of challenges in 2026, it seems prudent to be patient and wait for more signs of recovery progress before buying Greggs shares today. Luckily, there are plenty of other growth opportunities I’ve got my eye on right now.
