Since joining the stock market as a humble bakery in 1984, Greggs (GRG) has served up a stunning total return (capital growth plus dividends) of 53,549%, according to data from Refinitiv.

If you’d invested £5,000 at the time of the stock market listing, that outlay would have grown into £2.68 million if you’d reinvested all dividends. This tasty return demonstrates the power of compounding. Share price growth alone over that period amounted to a return of 17,559%.

But these gains are historic, so sceptical investors could be forgiven for thinking the company’s best days as a growth stock are behind it, that we’ve already reached ‘peak Greggs’.

The truth is the Tyneside-headquartered food-to-go operator remains in growth mode, deploying its strong cash flows to open new stores at pace while investing in supply chain capacity to support big growth ambitions.

MORE THAN SAUSAGE ROLLS

One of Britain’s best-loved brands, modern-day Greggs is a food-on-the-go operator that stands for more than just sausage rolls.

With over 2,200 shops nationwide, Greggs sells everything from fresh sandwiches and savouries to affordable coffees, breakfasts, confectionery and pizza slices. Today’s Greggs also retails healthier options including gluten-free, vegan-friendly and lower calorie products including the now-iconic vegan sausage roll.

Profit recovery coming out of the pandemic has been impressive. Management, led by relatively new chief executive Roisin Currie and long-serving finance director Richard Hutton, plans to double Greggs’ sales by 2026. Yet there are big challenges ahead in the form of inflationary cost pressures and a consumer feeling the pinch from the cost-of-living squeeze.

RETAIL RESILIENCE

Resilient operator Greggs is well-equipped to cope with inflationary pressures and a consumer recession – during the global financial crisis of 2007 to 2009, like-for-like sales remained modestly positive, though Hutton concedes nobody will be immune now from the current pressures.

He insists Greggs has always been resilient in more difficult phases of the economic cycle. ‘We are very focused on value food and drink, something people continue to need, particularly if they are out of the home. At a time like this, looking for exceptional value for money is bound to be at the forefront of peoples’ minds.’

Investment bank Berenberg believes Greggs is a more resilient business today than it was during the global financial crisis. It says the company’s exposure to the high street has materially reduced, from circa 80% of stores around 2007 to under 50% now. Its sales mix has shifted away from more discretionary items like sweet treats such as doughnuts. Berenberg also believes Greggs now attracts a wider range of consumers, including those on middle and higher incomes whose spending is likely to be more resilient.

Primark partnership creates a buzz

Finance director Richard Hutton is excited by the potential of Greggs’ clothing collaboration with value fashion purveyor Primark which has been ‘fabulous’, he informs Shares. ‘We’re now on the third “drop” of clothing with Primark, so we’ve got the Christmas range (including the Greggs Christmas Jumper),’ Hutton explains.

He says this commercial partnership, which brings together two value-oriented corporate names, has caused lots of buzz and news around the brand but there is a longer-term spin-off. Greggs has been working with Primark, initially in Birmingham, to open a café concept in its store.

‘It’s called “Tasty by Greggs” and is designed for the Instagram generation,’ says Hutton. ‘We’ve just opened the second of those in London’s Oxford Street. Watch this space, you might see a little bit of that to come in some of the other cities around the UK as well.’

RAISING PRICES

Hutton stresses that over the last 10 years, Greggs has become much more focused on the food-on-the-go market, one ‘heavily driven by people being out and about, often because they are in employment and need food and drink to keep them going.’

Cost inflation in ingredients, energy and wages means Greggs has had to hike prices, but Hutton closely monitors its relative value versus the competition and says that despite having to move prices a couple of times this year, the relative value of Greggs remains the same today as it did at the start of 2022.

The finance director says Greggs only raises prices when it ‘absolutely has to’ and works hard to avoid it. ‘I would rather already be the best value in the market when you are having to move prices.’

A further facet of Greggs’ resilience is a vertically integrated business model which has supported a long-run record of robust profit growth. ‘We make the majority of the things that we sell ourselves,’ explains Hutton. ‘We don’t have to negotiate with a supplier for the price of the products and we have the benefit of being a growing business.’

As Greggs opens more shops, this creates even greater demand for the products it manufactures and enables its bakeries and manufacturing facilities to stay busy. The busier a factory, the more efficient it is and that helps keep prices as low as possible.

In a reassuringly robust third quarter update (4 October), Greggs made no change to cost inflation guidance of 9%, which enabled it to maintain its full year profit outlook.

Share valuation

Despite earnings estimates holding firm, no mean feat given the pressures roiling the retail sector, Greggs’ shares are down almost 30% year-to-date and trade on their lowest multiple for years as investors are worried about the impact of a recession on its sales.

At £23.97, they trade on 19.7 times forecast earnings for the next 12 months. While that’s still a premium rating for a predominantly bricks and mortar retailer, it is worth noting that the shares traded as high as 33.1-times in 2019 and 29-times earlier this year, according to Stockopedia.

Eight analysts have ‘buy’ ratings on the stock, three have ‘hold’ and there are no ‘sell’ ratings, according to Refinitiv.

TAKING MARKET SHARE

Despite its 2,200-plus store footprint, Greggs only represents about 6% of a competitive food-on-the-go market, and Hutton says there are still consumers who don’t have convenient access to its offering.

‘The market is quite fragmented and there are many independents as well as branded players,’ he explains. ‘We believe there is a clear opportunity to have more than 3,000 UK stores, but the number may be even higher.’

The FTSE 250 company will open around 150 stores this year, faster than the rate of new store openings before the pandemic because it perceives there to be a greater availability of good shops at more reasonable rents. Backed by a strong balance sheet, Greggs is in ‘a good place to expand more quickly in this phase,’ enthuses the finance director.

Greggs’ exposure to the high street has materially reduced since the global financial crisis and this year, roughly two thirds of new openings will be company-managed shops, with the balance opened with franchise partners.

‘The nature of the shops that we are opening in our pipeline is slightly different to the places you might traditionally have seen us,’ says Hutton. ‘More often than not we are opening on roadsides, in retail parks, supermarkets, and that often requires some working in partnership to access those catchments.’

OPENING LONGER HOURS

In the first half of 2022, like-for-like sales in company-managed shops increased 22.4% and were 12.3% higher than the comparable period in pre-pandemic 2019. Greggs continued to trade well in the third quarter too, with like-for-like sales in company-managed outlets 9.7% ahead of the same period in 2021.

Hutton assumes most of the post-pandemic recovery has been seen, though he notes the number of walk-in customers visiting Greggs’ shops remains lower than it was in post-Covid 2019, suggesting there’s either more recovery to come or that consumer behaviour has shifted permanently.

A key discussion in the boardroom is to how to give the public more reasons to visit its stores. Plenty of people queue up for a bacon roll and a coffee before work and lunchtimes are always busy. Greggs needs to work out how to further increase sales per unit and that’s why evening trading is now on the menu, which broker Jefferies sees ‘presenting the most compelling like-for-like upside’.

By the end of this year’s third quarter, Greggs had 500 shops with trading hours extended until eight o’clock in the evening. ‘What we’ve seen is that period between four and eight is now the fastest growing time of day for sales, albeit from a very low base,’ says the Greggs numbers man. ‘That will be a driver of growth over a number of years.’

ONLINE ORDERS

A game-changing new growth channel is delivery, which enables Greggs to utilise shops in suburban or residential areas as kitchens for delivering food to the homes of ravenous consumers.

Greggs has an exclusive relationship with Just Eat and delivery, which was rolled out as a response to the pandemic, continues to be a meaningful part of its sales.

The company is seeing more of its sales being transacted through the Greggs App, relaunched in 2021 and which Hutton views as particularly of the moment because effectively it offers customers a 10% discount on everything they buy. ‘For us, it’s a worthwhile investment because of the additional visits from consumers. It’s a win-win for Greggs and customers and as we get more people signed up, we’ll understand more about their preferences and be able to offer them better deals.’

Drive-through sites are a small part of the sales mix, yet these are also proving popular because of their convenience and the space also allows delivery drivers and click and collect customers to come in and pick up orders.

Greggs boasts a strong pipeline of drive-throughs in the next two years, says Hutton. ‘We’ve proved to landlords that we can be a successful operator of drive-throughs and the landlords have been generating a greater number of opportunities for us in the market. You’ll see more and more Greggs drive-throughs popping up around the country.’

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