Bakery, cafe, and takeaway chain Greggs (LSE: GRG) saw its share price shoot up this morning on the release of its fourth-quarter trading update. But is Greggs still one of the best shares to buy now?
The company has navigated well through the coronavirus crisis so far and looks set to be a survivor. And I reckon there’s a good chance the growth strategy will deliver decent shareholder returns over the long term.
After all, many people love the Greggs brand. And the directors are finding ever more imaginative ways of getting tasty treats into the hands of customers.
Fallen profits but expansion pushes on
But the lockdowns and coronavirus costs have been tough on earnings. In 2019, Greggs had a cracking year and posted a pre-tax profit of just over £108m. Today, we learn the outcome for 2020 is likely to be a pre-tax loss of as much as £15m. I’ve been doing my best to consume as many Festive Bakes as I could this season. But, alas, my efforts were insufficient to save the firm’s bottom line.
The revenue figures don’t look too bad though. In the fourth quarter of 2020, company-managed shop like-for-like sales averaged just over 81% year on year. But as those who’ve run a business often learn, those final few percentage points of revenue can be essentially what generates the profit. All the rest is often gobbled up by costs.
Greggs has been doing what it can to adjust costs to the trading reality. And one unfortunate casualty of that review is that 820 members of staff have been made redundant.
Nevertheless, the expansion programme continued through the year with Greggs opening 84 new shops and closing 56 for a net gain of 28 new outlets. It’s interesting that when businesses become as large as Greggs, expansion is less than straight forward. However, as of 2 January, the business had grown to 2,078 shops, of which 328 were franchised outlets.
Optimistic long-term outlook
Greggs shops are popping up all over the place these days. But one development I didn’t see coming is the popularity of the firm’s delivery offer in partnership with Just Eat. The service is taking off and provided 5.5% of overall company-managed shop sales in the fourth quarter of the year. About 600 shops feed the service right now but Greggs plans to ramp up the total outlets involved to around 800 during 2021.
Looking ahead, the company is optimistic about its growth strategy once Covid restrictions finally end. However, profits will not be anywhere near 2019’s level “until 2022 at the earliest.”
Meanwhile, the company has been nimble and responsive to the demands of the crisis while keeping a steady eye on its growth objectives. And the share price has been recovering well since its lows last autumn.
The days of picking Greggs up as a cheap share are over for the time being. But I’m inclined to take a leap of faith and buy some of the shares now to hold for the long haul.
Kevin Godbold has no position in any share 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.