Greggs (LSE: GRG) has been a very rewarding investment over the last five years. The FTSE 250 stock is up 141%, excluding dividends. Over 10 years, it’s up almost 500%.
However, the last 18-month period hasn’t been great for Greggs shareholders, with the share price falling around 22%.
Yet I wouldn’t be surprised to see the stock regain lost ground and power on to new highs in future. Here’s why.
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Still growing
In the six months to 1 July, first-half sales at the high street baker rose to £844m, a 21.5% increase over the same period last year. Meanwhile, underlying profit before tax (excluding an exceptional item) increased by 14.2% to £63.7m.
Management said the rate of cost inflation had started to ease, boosting margins, and it expects this trend to continue in H2. However, it didn’t upwardly revise its full-year guidance, which was a little surprising.
Over the six months, the firm opened 94 new shops and closed 44. But it will open eight new stores across the UK in August and September. This will include a new drive-through, adding to its existing 15.
The interim dividend was hiked by 6.7% to 16p. The full-year payout is expected to be 49.5p per share, giving the stock a modest but welcome dividend yield of 2.3%.
Peak Greggs?
One concern for some investors is the possibility that the UK is approaching ‘peak Greggs’. This is the hypothetical point at which consumption of its baked goods will max out, after which sales and profits will plateau, along with the share price.
While a legitimate concern in theory, it doesn’t concern me. The company is continuing to find new and creative ways to get more food into consumers’ hands. It is set to open cafes in several Sainsbury’s locations by the end of the year, adding to the Tasty By Greggs cafes inside Primark stores.
The Gatwick Airport Greggs is now open 24 hours, and is the eighth airport store in the UK. And new menu options are being trialed, such as hot wraps, and the Greggs App loyalty reward programme is growing strongly.
Plus, the firm remains extremely ambitious, with plans to grow its estate to at least 3,000 shops, up from 2,378 at the end of July. It is hoped this will see its revenue grow to £2.4bn in 2026. Finally, international expansion is always an option.
The Golden Arches playbook
I have to say, when I read about its drive-throughs and 24-hour openings, I couldn’t help thinking of McDonald’s. Especially as Greggs now also has over 400 franchise shops.
It’s certainly not a bad blueprint, as the world’s most successful fast food restaurant chain continues to grow stronger every year.
Greggs’ budget-friendly customer proposition also shares some similarities with McDonald’s. So it’s no surprise to me to see both companies taking market share while consumer budgets are constrained.
Like McDonald’s, Greggs has an exceptionally strong brand and loyal customers. It has raised the price of its food in recent years without affecting sales, thereby demonstrating pricing power.
Finally, the stock has a price-to-earnings (P/E) multiple of 22, down from 27 in FY219. If I had spare cash to invest in August, I’d snap up some Greggs shares.
