The last 12 months has been a washout for Greggs (LSE:GRG) shares. They’ve dropped almost a quarter in value, as cash-strapped shoppers have trimmed spending on the firm’s sausage rolls and sweet treats.
At £16 per share, Greggs’ share price is also 53% below the record highs of £33.87 struck in late 2021. Is now the time to consider buying this battered FTSE 250 share? Let’s discuss.
Slumping sales growth
On the one hand, it’s easy to assume Greggs would be thriving even as the cost-of-living crisis rolls on. It sells some of the UK’s most popular classic dishes, from the aforementioned sausage rolls to pasties, doughnuts, sandwiches and cups of tea.
Food retail is one of the most stable parts of the economy, even during tough times. And by selling its goods at low price points, this particular operator should be especially immune, right? You can pick up an all-butter croissant here for £1.25, for instance, which is half of what you’d pay at Starbucks (£2.75, if you’re interested!).
But even Greggs has struggled as consumers have felt the pinch. It’s not that sales have gone into freefall. Indeed, the company continues to outperform the broader food-to-go market. Company managed like-for-like sales rose 2.9% during Q4, latest financials show.
The problem is that the baker’s a mere shadow of the hot growth stock it once was. During the final quarter of 2024, corresponding sales increased 5.5%. The year before that growth was 9.4%.
The problem for Greggs is that it still commanded the premium valuation we usually associate with an exciting growth share. So as sales growth slowed the market slashed its rating, sending its share price lower.
Time to look up?
The question is, have Greggs shares finally bottomed out? Catching a falling knife, to use a common investing phrase can be an extremely hazardous business. And there’s no doubt this share faces big challenges that could see it continue to fall.
Economic conditions remain tough in the UK, with higher-than-normal inflation persisting, wage growth slowing and unemployment on the up. In this climate, the baker could struggle to get people through its doors. It also faces fierce competition, which combined with cost pressures are squeezing margins.
However, with Greggs shares now trading on a forward price-to-earnings (P/E) ratio of 12.8 times, it has a strong foundation for recovery in my view. Its princely long-term P/E ratio of 22-23 is a thing of the past.
Are Greggs shares a potential buy?
The baker will need to start showing strong operational progress to restore investor confidence and rise again. But there are a number of levers it can pull to make this happen, from pushing further into delivery and evening trading, to introducing more successful menu innovations and opening new stores in more profitable locations.
The good news is it’s already showing some signs of recovery. Q4 sales growth of 2.9% was weak by historical standards, sure. But it was far improved from the 1.5% rise printed in Q3. While risks remain, I think Greggs shares are worth consideration by investors seeking recovery stocks.
