There aren’t too many FTSE 250 firms I’d call iconic. Aston Martin, Dr Martens and Warhammer maker Games Workshop spring to mind. But Greggs (LSE: GRG) is certainly also in that category, in my opinion.
Last summer, I remember seeing a group of young lads going to a festival. They were all decked out in Greggs basketball vests (part of the Primark X Greggs range).
Another time I saw someone wearing a white Greggs hoodie with the words ‘It’s a Pasty Thing’ written down the sleeve. Brilliant!
Last Christmas, the bakery chain even opened a Bistro Greggs, where the Festive Bake was served a-la-carte “with duck-fat roasties, smoked pancetta, chestnuts and sprouts, with a pouring of silky gravy“.
Clearly, the cult brand doesn’t take itself too seriously. But behind the self-deprecating humour, this is a serious business, as long-term shareholders will attest to.
The stock’s delivered a 20.5% annualised total return (share price and dividends) over the past decade!
While it’ll be difficult to match that over the next 10 years, I still think the shares will do well. Here’s why.
Strong start to 2024
On 14 May, the company released a positive trading update. It reported a 7.4% rise in like-for-like sales at company-managed shops for the first 19 weeks of the year.
Total sales rose to £693m from £609m a year earlier. The firm said transaction volume growth was driven by increases in delivery sales, more evening trade and rising use of the Greggs App.
Meanwhile, 27 net new shops were opened, bringing the total to 2,500. It’s confident in achieving 140-160 net openings in 2024.
One negative, though, is ongoing cost inflation. It is expecting a 4%-5% rise in costs over the year.
Still, management said its outlook for 2024 remains unchanged. Analysts are expecting £2bn in revenue (around 11% growth) and net profit to increase about 8% to £137m.
So growth goes marching on at Greggs. And there’s also a small but growing dividend.
Menu innovation
Now, one risk I see here is a long-term shift towards healthier eating. This could be even more pronounced if weight-loss drugs like Wegovy take hold in a big way.
These medicines can suppress appetite, potentially causing customers to cut back on the sort of high-calorie indulgences Greggs is famous for. This is worth monitoring.
That said, I think the company is ahead of the curve here. It has been expanding its healthier food ranges, including a vegetarian pesto and mozzarella pasta dish to accompany its vegan sweet potato bhaji and rice salad bowl.
High-quality
The firm’s aiming for 3,000 shops over time. To support this, it’s developing two new production sites in the Midlands. Both are expected to be operational by early 2027.
Meanwhile, there’s now a Greggs at London Gatwick Airport, as well as 24-hour drive-through locations. I can get food delivered on both Uber Eats and Just Eat, while it has opened four shops with Tesco this year.
All in all, the company’s serving up exactly what shareholders like myself want to see.
The shares aren’t cheap at 20 times earnings, but this is a high-quality business with loyal customers and smart management. If I didn’t already own the stock, I’d buy it in June.
