For investors in bakery chain Greggs (LSE: GRG), November has been as sweet as one of the company’s cakes. The Greggs share price has had a weak 2020. But it rallied 30% in the past month. Vaccine hopes lifted the market broadly. They definitely helped to boost the bakery chain. There are hopes that busier shopping areas and less home-working will restore demand for the purveyor of sausage rolls and sandwiches.
The share price rise has been welcome. However, I think the outlook remains challenging for the company. After their recent price rise, I would not buy shares in Greggs.
The retail environment remains extremely challenging
There is a relentless flow of bad news in the UK retail sector currently, with respected news sources suggesting Top Shop owner Arcadia could be on the brink of collapse. Retail bankruptcies combined with lockdowns mean that customer traffic in retail areas will remain depressed for some time to come. Greggs has worked hard to combat that, including selecting sites away from town centre shopping hotspots. But if shoppers stay at home, it is hard to see how that won’t be negative for the Greggs share price.
In its company-managed shops, the company said that like for like sales were 76% of where they had been the prior year. That is a creditable performance, but it is still a big step down from the normal level. It is hard to see how the company can be very profitable if it has lost around a quarter of its sales. It has increased its digital offering. But in my opinion its low-cost products don’t lend themselves well to a home delivery model.
The latest lockdowns have likely dented November’s revenues significantly, but I am more worried about 2021. I think a bad 2020 was priced into the shares. But the recent rebound in the Greggs share price suggests confidence in the future outlook. However, there is a lot of doubt about when retail levels will return to their normal levels. If lockdowns extend well into 2021, the hoped for recovery may not come to pass any time soon.
The Greggs share price does not look cheap to me
Many investors have long liked Greggs for its strong brand, cult following, and efficient management. That means that the shares sometimes trade at a level that I find expensive.
The current Greggs share price means the price-to-earnings ratio is close to 20. That is before allowing for exceptional costs which reduced earnings last year, and would put the multiple higher. Yet earnings this year and even next are unlikely to come near last year’s level, in my view.
I think the shares are priced for a rapid recovery, but in fact the time it takes for the retail sector to return to normal is hard to assess. While the sales indicators have moved in the right direction, a tough environment continues to challenge retailers including Greggs. So I don’t think the share price looks cheap at today’s levels. I would not buy them after the recent share price jump.
christopherruane has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.