Greggs (LSE: GRG) shares punch above their weight, attracting a lot of attention for a medium-sized FTSE 250 company. That’s often the case when the stock is a household name that everybody has a view on.
The Newcastle-headquartered bakery chain has faced a lot of class-based and regional prejudice, and turned this to its advantage. Its vegan sausage roll was one of the greatest marketing strokes of the decade. Everybody was talking about it.
Nobody looks down on Greggs today. The spirit of the age is to love it. I’ve been doing up my flat lately, and usually around mid-afternoon I’ve got a raging hunger, and no kitchen to cook in. I used to buy my quiche and sausage rolls from upmarket chain Gail’s, but that’s expensive.
FTSE 250 star
For the price of one of its herbie, foodie sausage rolls, I can get two from Greggs, plus a smoothie and some southern-fried potato wedges (with a free BBQ sauce sachet). With luck, I might get a smile.
Greggs isn’t gourmet but it is a cheap treat, and mine is full of schoolkids, builders, mums and shop workers filling up.
There’s nothing special about my shop. I can’t imagine it’s much different to the 3,000 Greggs branches across the country. Of these, 1,200 open for sales until 7pm or later. As does mine. I wouldn’t go there in the evening, though, so I’m interested to see how they do. I bet the new flagship Greggs in Leicester Square does a roaring trade. Greggs is also available on Just Eat and Uber Eats.
The management team are no mugs. Last year, total sales jumped an impressive 19.6% to £1.8bn. Underlying pre-tax profit rose 13.1% to £167.7m.
Margin call
The share price has been on a roll, jumping 19.54% in six months. It’s up just 3.32% over one year, but long-term investors won’t be complaining with growth of 53.03% over five.
It pays income too. In 2023, investors enjoyed a total ordinary dividend per share of 62p. That’s up 3p from 59p in 2022, a rise of 5%. That was hiked 3.5% from 2021’s dividend of 57p. The forward yield is 2.5%, covered 1.9 times earnings. I’d buy for growth rather than income.
I was concerned to see gross margins fall in 2023, from 62% to 60.8%. This reflected food price inflation, which has been retreating lately. The board says it expected energy costs “to be marginally deflationary in 2024”. With oil heading towards $100 a barrel on Middle East tensions, that may not happen.
Overall wage and salary inflation was 8% in 2023. That’s expected to climb to 9.5% in 2024, with Greggs hit by the 10% increase in the National Living Wage and enhancement of pension benefits. I’m wondering how the cost-of-living crisis will play out. If it eases, and shoppers get more money in their pockets, will they buy more sausage rolls from Greggs? Or will they upgrade to the likes of Gail’s?
Greggs currently trades at 22.3 times earnings. In contrast to its baked goods, that’s expensive. It’s a great company, but I don’t think it’s a great investment at this price. I’ll stick to the sausage rolls.
