The Motley Fool

Time to tuck in to Greggs plc after today’s update?

Ubiquitous food-on-the-go retailer Greggs (LSE: GRG) released some positive numbers to the market this morning. After a rather mixed 2016, should investors see today’s update as a sign to pick up its stock? Let’s look at the numbers.

Strong Christmas

According to Greggs, Christmas trading was “particularly strong“, with demand for mince pies and festive bakes allowing the company to generate shop like-for-like growth of 2.3% in the final two weeks of the year. With sales rising 6.4% over the last three months, this was the company’s 13th consecutive quarter of like-for-like sales growth. 

When today’s figures are taken into account, total sales at the £989m cap rose 7% in the 52 weeks to the end of December, with company-managed like-for-like sales up 4.2%. Positively, Greggs now expects full-year results to be “slightly ahead of previous expectations.” So much for the high street’s inevitable decline.

As far as 2017 is concerned, the business said that it would continue to invest in improving its systems and developing its supply chain, while also cautioning that uncertainty in the trading environment would see “increased pressure on real income growth.” Although expecting to see “industry-wide cost pressures” this year, Greggs did seek to reassure investors that these would only have a “modest impact” on short-term margins.

Shares in Greggs shot up almost 5% as markets opened this morning, leaving the company on a price-to-earnings (P/E) ratio of around 17. Although perhaps a little more than I’d like to pay, this still doesn’t seem overly expensive given its history of generating high returns on capital. A safe 3.4% yield and £35m cash on the balance sheet makes the investment case even sweeter.

Tasty alternative

Those investors keen to tap into the UK’s love of baked treats may also be tempted by the shares of fellow retailer — Patisserie Valerie (LSE: CAKE).  

Back in November, Patisserie reported its tenth consecutive year of revenue and profit growth with the former exceeding £100m for the first time and gross profits rising 14.5% to £81.3m. Online sales were a particular highlight, jumping 23% to £3.8m. The company’s reported net cash position of £13.3m — £7.2m more than the previous year — was the icing on the cake.

I can’t say I’m surprised by recent results. With many years of strong returns on capital and high operating margins relative to the rest of the market, Patisserie presents as a classy business. Moreover, thanks to its plans for the future, I continue to view its shares as reasonably valued, albeit not quite the deal they were before November’s results were announced (they’re up 17% since).

While a P/E of almost 20 for 2017 looks steep at first glance, CEO Luke Johnson’s target of opening 20 new stores every year justifies this fairly high valuation, in my opinion.  Not only did the company exceed this figure in 2016 (some of which are already “trading ahead of management expectations“), it has also managed to open another six stores since the year-end. This approach, coupled with the company’s seemingly well-received online offering, should continue driving revenue and profits higher over the medium term.

In sum, while Greggs may suit investors keen to generate a steady income stream from a quality company, I think Patisserie has the edge when it comes to growth prospects.

If you're on the hunt for companies with strong plans for growth, you'll definitely want to read a special report brought to you by Mark Rogers at the Motley Fool. He's a big fan of another unmistakeably British brand, one that has the potential to go global over time and reward loyal investors while doing so.

What's the identity of this mystery share? Click here to find out. Mark's report is absolutely FREE and without obligation.

Paul Summers has no position in any shares mentioned. The Motley Fool UK has recommended Patisserie Holdings. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.