In its 83-year history, Greggs (LON: GRG) has made very few missteps. There was a time when he tried to start serving sourdough patties as a “healthy option” and the incident when a questionable parody of the company logo ended up on Google images. But that’s all. Customers and shareholders alike have benefited from Greggs’ unwavering quality.
But will those customers continue to buy sandwiches and empanadas during a recession at a rate that keeps sales rising above inflation-heavy costs? That is a question that is clearly on the minds of shareholders.
After a 33% drop so far this year, Greggs shares are trading 18 times forecast earnings. Could this be a rare entry point for investors who have been unable to stomach the exorbitant price tag of this quality operator?
- Annual sales (until December 2021): £1.2bn (5% CAGR 5yr)
- Annual revenue per store: £559,000 (from £518,000 in 2018)
- Annual operating profit: £153m (8% 5yr average operating margin)
- Return on capital employed: 23% (19% 5-year average)
- Operating Cash Conversion: 180% (140% 5-year average)
Profile: From delivery to bakery and vice versa
In 1909, John Gregg bought a handcycle so he could start delivering eggs and yeast from his family’s bakery business to working-class homes in Newcastle. While he was fighting in World War II, his wife upgraded to a van and used it to deliver candy and bread ingredients. By 1939 the Greggs had founded their own bakery business and in 1951 they opened their first shop on Gosford High Street.
The Greggs chain of bakeries expanded rapidly in the late 20th century, selling its own baked goods through its shop in the north of England. In 1985, the company was listed on the Main Market of the London Stock Exchange, a component of the Consumer Cyclicals industry group.
Earnings increased every year between 1991 and 2006, providing investors with a steadily rising stock price and a healthy dividend on top. But the financial crisis and increasing competition from emerging bakery counters in supermarkets wiped out reliable returns.
In 2013, Roger Whiteside was hired to stabilize the ship. At the time, more than 80% of Greggs’ sales came from on-the-go foods. And so the company changed gears. Instead of bakeries, it would strive to become the UK’s leading takeaway food retailer.