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Greggs expansion still has legs
Investors seeking a tasty growth and income stock for uncertain times should snack on bakery food-on-the-go retailer Greggs (GRG). Shares believes the affordable sausage rolls-to-sandwiches seller can expand its estate significantly, while self-help measures should help sustain its run of strong like-for-like sales momentum.
Under CEO Roger Whiteside and since the fourth quarter of 2013, Newcastle-headquartered Greggs has generated 2%-plus like-for-like sales growth in every quarter, driven by its transformation from traditional baker into a food-on-the-go business.
Breakfast meal deals and savoury favourites provide the earnings ballast, although Greggs now offers a range of healthier products spanning sandwiches, salads, bakes and soups and has widened its sugar-free drinks range to tap into changing consumer preferences.
Greggs is already an established operator with a network of more than 1,800 branded UK food-on-the-go outlets. However, Greggs is adding new stores and believes it can expand its estate well beyond 2,000 UK stores in the medium term.
Not only is Greggs successfully shifting its exposure away from shopping locations and towards areas centred on work, travel and leisure, it also has low store coverage in England’s south west and Northern Ireland and can therefore increase its shop numbers by high double digits over the coming years.
Key competitors (Subway, Costa Coffee) have significantly more stores, implying room for Greggs to expand, while a popular debut ‘Drive-Thru’ shop in Greater Manchester indicates a demand for further Drive-Thru locations.
Disposable incomes are softening, input costs rising and the food-on-the-go market is ultra-competitive. Yet Greggs looks well placed to cope given its value credentials as well as self-help measures including store refits and investments across systems and supply chain.
Following strong first half results (1 Aug), which revealed positive 3.4% like-for-like growth and a good start to the second half, Berenberg upgraded (9 Aug) Greggs from ‘hold’ to ‘buy’ and upped its price target from £10.20 to £13.
For calendar 2017, Berenberg forecasts adjusted pre-tax profits of £81.4m (2016: £80.3m) and a 31.9p dividend, rising to £86m and 33.8p respectively in 2018. Greggs’ strong cash generation and balance sheet support this progressive dividend, though the retailer has form with one off returns of capital too, having paid a £20m special dividend in July 2015.
Management targets £40m of net cash at year-end, but should this cash position rise materially north of this level, it will return capital to shareholders. Though given the supply chain investment underway, 2019 is likely to be the earliest point at which such a return will occur.