In the preliminary full-year results posted last month, Greggs (LSE:GRG) recorded a healthy 6.8% growth in total sales. It also remains the number one food-to-Go (FTG) brand for value. Yet the Greggs share price is down 9% over the past year and 41% over the past two years. There’s clearly a disconnect here, so why aren’t the shares going up in price?
Problems under the bonnet
Let’s dig deeper into the latest financial results. While sales are still growing, profits are heading in the opposite direction. Underlying profit before tax fell by 9.4%. Factors impacting this were rising wage costs, higher packaging expenses, and heavy investment in new distribution centres. These have acted to squeeze margins, and it’s a classic case of a firm growing but earning less, which rarely excites investors.
On a different angle, growth quality is under scrutiny. What I mean by this is that much of the revenue increase is coming from opening new stores rather than strong like-for-like demand. Smart investors have spotted this trend as well over the past year. That raises a red flag because it could indicate that we aren’t seeing genuine demand expansion. This is even more compelling when I look ahead, given we have a cautious UK consumer right now, still being hit by cost-of-living pressures.
Lastly, more subtle structural concerns are creeping in. Some have pointed to changing eating habits, potentially hitting demand for high-calorie snacks (like the Steak Bake). Combine that with even some odd elements, such as weather volatility, and it becomes more apparent why Greggs’ shares have been underperforming for some time.
The direction from here
I’m not saying that Greggs stock is going to keep falling for years to come. There are promising signs. Market share is increasing, which is a very good sign that consumers are switching from alternative providers and going to Greggs. A steady stream of new customers helps long term. Even though some might not agree with it, the expansion strategy of pushing for more stores and longer opening hours does provide it with a larger footprint, which ultimately could boost profits once costs settle down. In addition, cost pressures that hurt 2025 results are expected to ease, potentially allowing margins to recover later this year.
The current price-to-earnings ratio is 13.4, which is above my fair value benchmark of 10 and above the FTSE 250 average ratio of 9.7. From that angle, I don’t see any immediate catalyst for the stock to rise. If anything, my view is for the stock to tread water until investors become convinced that profitability can be improved. In the meantime, the risks remain though. On that basis, I don’t think it’s a compelling purchase for me at the moment, but I have the stock on my watchlist.
