We’ve all seen the signs on the shop door: “One customer at a time, please.” Social distancing requirements are making trading extremely tough for the shops that have managed to stay open during the coronavirus outbreak, the smaller outlets in particular. Even larger retailers — the supermarkets, say — have had to control the numbers of shoppers coming into their stores to ensure that people can keep sufficiently far apart.
What this might mean for Greggs, the bakery chain whose smaller shops on high streets rely on large volumes of relatively small individual purchases, is not hard to imagine. Indeed, the FTSE 250 company, which shut its shops when the lockdown was imposed in late March, had to abandon an initial plan last month to reopen 20 of them amid fears of crowds gathering.
Greggs was founded in Newcastle as an eggs and yeast delivery business by John Gregg, who opened his first shop in Gosforth in 1951. It sells rolls, sandwiches, pasties and bakes from just over 2,050 stores nationwide and has been working to a plan to get to above 2,500.
Under the leadership of Roger Whiteside, 61, its chief executive, Greggs has been transformed from a slightly tired bakery chain famous for its sausage rolls and fatty pasties into a bustling retailer that sells fresh and healthy food for busy consumers on the go, from salads and wraps to vegan snacks and hot drinks.
The global pandemic has been seriously bad news for it. Barely three weeks before the lockdown began, it reported record sales and profits and dangled the prospect of a special dividend for shareholders at this year’s interim results.
Now the final dividend of 33p a share has been dropped and, while Greggs has not publicly abandoned the idea of a special payout, it seems unlikely. This is especially the case as the company has drawn on state assistance through the government’s cheap financing scheme and pay guarantees for furloughed staff.
It would be foolish to write off Greggs, which has shown its ability to adapt to tough trading conditions by, for example, shutting some of its town and city centre stores and reopening in better-suited locations such as train stations and bus depots. It introduced seating to some shops, giving them more of a café feel and helping to improve sales.
Greggs has been working on plans to reopen its estate, reinitiating trials in a small number of stores with the aim of trading from more in stages as from the middle of next month. It has been testing online orders through Just Eat and a click-and-collect system for limited store visits.
Nevertheless, when trading fully resumes, regaining its momentum will take time. Assuming that the two-metre social distancing rules stay in place for months to come, sales are bound to be hit by the reduced capacity of its shops. Providing protective clothing for its 25,000 staff will increase costs still further.
Having raised £150 million by issuing commercial paper, a form of short-term security, under the government’s programme, Greggs has the financial wherewithal to survive, even if its shops have to stay closed for the rest of the year. In the meantime, the shares have been weak. When this column recommended buying them last June, they stood at £22.34. Though up 94p, or 6.1 per cent, yesterday, they were valued at £16.34.
In the present climate they’re still not a bargain, changing hands for nearly 17 times Investec’s forecast earnings. The uncertainty of the outlook should probably act as a deterrent for new investors, but existing shareholders should hang on.
ADVICE Hold
WHY Sales will eventually recover, though it might take time; meanwhile the shares are not cheap
At the end of December, a matter of weeks before the Chinese authorities put Wuhan City into lockdown, shares in 4imprint touched a record £35. The FTSE 250 producer of marketing materials was on a roll, having told shareholders to expect an increase in revenues for the year to December 28 of about 16 per cent, an expectation that it then beat.
However, since then, as international shutdowns first interrupted its supply chains and then knocked the stuffing out of demand for its wares, 4imprint’s value has fallen sharply. The shares, up 63p, or 3.2 per cent, at £20.35 yesterday, are down by almost 42 per cent this year.
4imprint was founded in 1985 as Nelson Marketing and sells an astonishingly wide array of marketing materials, 40,000 individual products, from branded mugs and T-shirts to umbrellas. The company gets about 60 per cent of its materials from China and the vast majority of its revenues from the United States, where it supplies the conferencing and exhibitions circuit, as well as individual companies.
Having initially fretted about what a shutdown in China would mean for its supply chain, 4Imprint was able to turn to other suppliers in America. In the event, the bigger concern has been demand, which fell by 60 per cent in early March before dropping to about 80 per cent below its level at the same time last year.
This is not hard to understand: as America went into seizure, companies that effectively ceased trading had little to promote and the events business ground to a halt.
4imprint hasn’t updated since early last month, but it seems likely that conditions will be improving as states in America remove restrictions and businesses resume trading. The group is well placed to recover from a crisis likely to have put some of its rivals out of business, although the it may have done the same to some of its customers. It is cash-generative and debt-free and is likely to benefit from strong relationships with its suppliers, which it is renowned for treating fairly. With the dividend suspended, there is no yield, but the shares — famously highly rated — trade for 18.7 times Peel Hunt’s forecast earnings. Buy for the long term.
ADVICE Buy
WHY Quality business that will thrive after Covid-19
