Bakery food-on-the-go retailer Greggs (LSE: GRG) owns a much-loved brand in the UK. But the FTSE 250company was one of those that closed almost all its operations in the lockdown. However, in today’s half-year results report, we can see the firm has been adapting well and operations are bouncing back. The directors said in the report that sales recently hit 72% of the level achieved during 2019. I reckon Greggs’ shares have a good chance of recovering too.
Why Greggs’ shares look set to recover
I think that’s encouraging news. The firm opted for a cautious approach to reopening its shop estate under social distancing restrictions. In early May it trialled “a small number” of shops to test its new social distancing measures and operational processes. Then, on 18 June, 800 shops opened to takeaway customers. Finally, from 2 July, the rest of the estate opened for takeaway – more than 2,000 outlets in total.
Chief executive Roger Whiteside reckons the company has demonstrated resilience and he puts that down to the “broad appeal” of the brand and the “widely distributed” shop estate. But I reckon the impressive crisis plan devised and executed by the management team has also been a big part of the rebound success so far.
The directors have reduced the product lines offered to concentrate on best-sellers. One of the challenges is that the stores tend to be small. And social distancing measures slow down customer throughput. It makes sense to concentrate on stuff that has a high probability of selling.
However, the tactic means around 25% of the staff remain on furlough, mainly in production operations. But the directors intend to put more employees back to work as sales pick up. And my expectation is that sales will continue to climb.
Close to profit breakeven
Right now, Greggs is trading at operating cash breakeven, which suggests the assault on the balance sheet has been halted. Net debt for the first six months of the year came in at just over £26m. But there were many expenses in the period. And the calculation includes temporary finance of £150m. The company arranged that using the joint HM Treasury and Bank of England Covid Corporate Financing Facility.
Looking ahead, the directors reckon the business will break even in terms of profit at 80% of 2019 sales – it’s almost there! Whiteside reckons Greggs is now “better placed to adapt to new conditions than ever before.”
There’s no doubt that the Greggs business has been financially stressed through the crisis. Indeed, the firm saved a few million by cancelling the interim dividend. But I think the company has a good chance of surviving and thriving in the long term based on the news in today’s update.
Meanwhile, at 1,406p, the share price has dipped a little today. But at these levels, it could prove to be an unmissable bargain. We’ll find out more from the company with the third-quarter update due on 29 September.
