Value savouries-to-sandwiches seller Greggs (GRG) falls 7.6% to 489.9p despite serving up better-than-expected full-year results. Analysts upgrade earnings forecast as the high street baker shows it is beginning to transform its fortunes, though the costs of its turnaround drive will crimp profits growth for the next two years.


Web chart - Greggs - 26 Feb 14

A running Shares Play of the Week, Greggs reports an 18.9% drop in pre-tax profits to £41.3 million on total sales up 3.8% to £762.4 million for the year to 28 December. Profits were impacted by extreme weather, convenience store expansion by supermarkets and the squeeze on consumers' disposable income.


Yet bulls point out this result was ahead of the downgraded £40.1 million consensus and cash-generative Greggs also held the dividend at 19.5p, allaying fears of a cut. Crucially, the £512 million cap's self-help strategy is already beginning to resurrect like-for-like sales. In an improving trend, second half like-for-likes grew 1.2% versus a 2.9% first-half decline. Positive momentum has continued into 2014, with like-for-like revenues 2.1% ahead over the eight weeks to 22 February, though admittedly against a weak snow-impacted comparative period last year.


As Shares has previously explained, chief executive officer Roger Whiteside is pursuing a strategy to rebuild Greggs' market share through a focus on the £6 billion and growing 'food-on-the go' market. At the same time, he is investing in store refits, higher value products, customer service and staffing levels. A restructuring programme to drive out cost is also underway.


With an eye on future proofing Greggs, Whiteside is also reducing the retailer's exposure to the structurally-challenged UK high street. Tellingly, 70% of last year's new shop openings were in locations other than high streets such as motorway service stations, retail and industrial parks and travel hubs, places where consumers work, travel or spend their leisure time.


Panmure Gordon reiterates its 'buy' rating on Greggs, raises its price target from 500p to 600p and writes: 'Consensus forecasts of £41 million for 2014E are unlikely to move materially but improved retailing skills – as evidenced by the launch of the digital loyalty and payment scheme announced today – underpin our confidence in the business over the medium-term.'


N+1 Singer raises its 2014 profit estimate by 4.7% to £42.2 million and upgrades 2015 profits 9% to £44.6 million. It says: 'We accept that the competitive landscape will remain challenging. However, we take encouragement from the structural and operational changes being implemented by the new CEO, an improving macro backdrop and the fact that Greggs is in a relatively better position than 12 months ago.'

Issue Date: 26 Feb 2014