Questor share tip: Greggs shares tumble 14pc as growth slows

Greggs
£10.49 -176p
Questor says HOLD

Shares in Greggs [LON:GRG] fell 14pc after sales at the bakery chain slowed in the fourth quarter.

However, Questor thinks the sell-off was overdone as the long-term growth story remains intact, and the company’s opportunity to return cash in the future is attractive.

Changing eating habits

Greggs looks well placed as the UK’s eating habits adapt to a world where everyone is short of time. The trend of grabbing a sandwich and a drink for lunch is well established; now breakfast is also being squeezed. This trend has been a boon for Greggs, which has its roots in providing baked treats across the north of England.

Roger Whiteside, chief executive, said the fastest growth in sales is coming from the breakfast-on-the-go part of the menu, along with new hot lunch offerings such as wraps and the calorie-conscious “Balanced Choice” range. The company is not taking the threat from coffee shops lying down either, and is releasing its own “flat white”.

Steady sales

It is against this retailing shift that Greggs’ fourth-quarter trading must be viewed. Investors may have been disappointed with like-for-like sales growth of 2.3pc from stores owned by Greggs - which was less than half the 4.9pc growth in the third quarter and 5.9pc across the first half - but this isn’t the time to panic.

_{Chief executive Roger Whiteside has overseen a turnaround of Greggs}

Total annual sales were up 5.2pc, while the number of stores increased by 48, to almost 1,700, with about 200 refurbishments last year.

Mr Whiteside has broadly similar plans in the year ahead, and is looking to add a net 50 stores and spruce up 200 existing sites. The other big project this year will be overhauling the accounting systems for all the shops. When this is all added together, capital spending is expected to rise to about £70m, from £65m last year.

Greggs should also benefit from falling food prices, which will help its nine regional bakeries churn out lower-cost products. This, in turn, should help with wage pressures from the 19,500-strong workforce.

Profit target eased back

Having increased the profit outlook just three months ago, analysts were forced to move it back again. The market now expects pre-tax profits of £72m, giving earnings per share of 55p, when annual results are announced in March.

The food retailer is also attractive from an income perspective. The company paid a 20p special dividend in July last year; on top of 25p in annual payouts that should be declared in March, that translates to a 4.2pc yield on the shares.

Investors can’t always bank on a special dividend, but Greggs has adopted a policy of returning any excess cash above £40m on the balance sheet. As a result, a special dividend in the region of 20p every other year looks affordable.

In truth, the shares have been on an excellent run - gaining more than 50pc during the past 12 months - and markets had got ahead of themselves with the shares trading on 21 times forecast earnings. Having dropped 176p to £10.49 yesterday, the stock now trades on a more modest 18 times earnings. The only downside here is being asked to pay 18 times earnings for a food retailer that is increasing profits by 7pc and sales by about 5pc a year.

We retain our long-term hold.