Newcastle Upon Tyne-headquartered baker Greggs (GRG) gains 12.5% to trade at £13.91 on Tuesday after reporting a strengthened recent trading performance. Investors are gorging themselves on Greggs’ stock as the food retailer reports a 4.5% fattening up of company-managed like-for-like sales over the eight weeks to 24 November and upgrades 2018 profit expectations accordingly.
COOKING UP POSITIVE SURPRISES
The UK’s leading bakery food-on-the-go retailer cooked up a surprisingly robust third quarter trading update in early October, leaving full year expectations unchanged at the time despite a headwind from ‘particularly hot weather’.
Today, Greggs serves up a surprise positive update, highlighting momentum strengthening further through October and November to date despite tough times for the UK high street.
Like-for-like sales growth of 4.5% for the eight weeks to 24 November is ahead of expectations and has been accompanied by good cost control.
‘This stronger trading in October and November is particularly encouraging as it builds on good comparative sales in the same period last year,’ enthuses management at the value sausage rolls, coffees, doughnuts and value meal deals seller, which has also pivoted towards healthier products under astute CEO Roger Whiteside.
UPGRADES ON THE MENU
‘Operational costs have been well controlled and, whilst there is still much to play for over the final few weeks of the year, the board now anticipate that full year underlying profit before tax (excluding exceptional charges) will be at least £86m.’
Previous guidance was for pre-tax profit at ‘a similar level to 2017’, so implying £81.3m of PTP, which means today’s update represents an upgrade of at least 5.8%.
THE EXPERT'S VIEW
Russ Mould, investment director at AJ Bell, comments:
‘It may not be the most glamorous of names but in stock market terms budget baker Greggs has star quality. The company has an excellent dividend track record and has not stood still, pivoting from its focus on traditional baking to a broader cheap food-on-the-go option in recent years.
‘This seems to be a winner with punters judging by its consistently robust like-for-like sales growth, something which is reflected in today’s decent trading update.
‘The company has also been busily reducing its dependence on the high street by opening new outlets in locations which capture work, travel or leisure-related footfall - think stations, airports and the like.
‘As Greggs makes a lot of the goods it sells, it is highly operationally geared or, in other words, any increase in sales has an outsized impact on profitability.
‘As a result, the accelerating momentum from what was already a strong third quarter is prompting material earnings upgrades today.
‘Operational gearing works both ways and a deterioration in trading would have a disproportionate impact on the downside too. Though Greggs is not unaffected by what is happening in the consumer backdrop, its attractive prices should provide some resilience against economic uncertainty.'
