One is priced to perfection and the other faces a difficult recovery
Thursday 30 Jul 2020 Author: James Crux

Results from two of the stock market’s best-in-class consumer-facing companies triggered opposite share price reactions on the day (28 July), moves that demonstrated the contrasting fortunes of the pair.

While fantasy miniatures maker Games Workshop (GAW) gained on the expectation its stellar growth will continue, food-to-go retailer Greggs (GRG) cheapened on uncertainty regarding when it will ever return to 2019’s earnings level in an era of social distancing.

High-flying Games Workshop added another 10% to trade at £93.08 after the Nottingham-based company hailed the ‘best year’ in its history, leaving the company trading on more than 11 times the record sales generated in the year to May 2020.

Despite the pandemic, Games Workshop delivered another year of record revenue, profit and cash generation, boosted by online success and customers spending lockdown painting its models and expanding their collections of wizards and warriors.

However, there is now the very real danger that any disappointments will be harshly punished by the market.

Put simply, optimistic investors are pricing in the flawless execution of a growth plan which focuses on generating royalties through the exploitation of intellectual property through the creation of computer games, TV shows and other media projects.

Games Workshop is in the final stages of developing a TV project based on one of its most popular Black Library novel series, Eisenhorn, for instance.

Heading in the opposite direction was value sandwiches-to-sausage rolls retailer Greggs, which soured a further 5.8% to £13.75 after it served up downbeat results for the first half to 27 June, leaving the stock 44% off its 52-week high. This was a period during which Greggs’ stores were closed for weeks on end, so there were no real surprises here.

Yet the forward-looking market is now concerned over the impact subdued footfall will have on the business, as many people continue to work from home and consumers remain skittish concerning the virus.

Greggs has done everything it can to adapt to the new retail world whilst sensibly slimming down its product range to focus on best sellers, but the retailer expects sales to remain below normal so long as social distancing persists.

The positive news is that Greggs pointed to an ‘encouraging’ sales trend since shops reopened and said it would continue to invest in new stores, albeit at a slower rate than planned pre-Covid.

Company-managed shops – as opposed to franchised stores – saw sales reach 72% of 2019 levels in the week ended 25 July and at a group level the firm is now back to trading broadly at operating cash breakeven, which may hearten contrarian investors.

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