Greggs (LSE: GRG) shares are among the most widely watched on the entire FTSE 250. I’ve always thought that brand recognition plays a big part in this. Everybody has an opinion on Greggs, both negative and (increasingly) positive.
The bakery chain was a bit of a cult in the North-East, thanks to its Newcastle roots, but a joke elsewhere. PR masterstrokes such as its vegan sausage rolls changed that, heating up what could easily have become a stale brand. The cost-of-living crisis helped, giving people a cheap treat in tough times.
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Does this FTSE 250 stock still have sizzle?
Greggs has given meat to its marketing strategy with its ambitious expansion plans. Management aims to lift total store numbers from 2,500 to 3,500, and not just on the high street. It’s targeting railway stations, airports, supermarkets, and retail parks, while testing evening openings.
Management keeps margins high by quickly shuttering outlets that don’t pull their weight. But has it suddenly hit the wall?
When I looked at the Greggs share price for The Motley Fool on 23 August, it was still red hot. First-half sales were up 14% to £960.6m. And it was branching out into new product lines including flatbreads, pizzas and iced drinks.
I had £3,000 sitting in my trading account but I didn’t buy Greggs. The shares looked a little pricey, trading at a price-to-earnings ratio (P/E) of 23.65. That was almost double the then FTSE 250 average of 12.4 times. So not exactly a cheap treat. I was concerned that a lot of growth was baked in, and while Greggs looked good to go, it was vulnerable to bad news.
My conclusion three months ago? “I’ll look for a better value stock to sink my teeth into. But this is a well-run business with bags of growth potential. Ultimately, the joke could be on me.”
This growth stock still has bite
But for once, it wasn’t. Since then, Greggs shares have slumped from 3,176p to today’s price of 2,700p. That’s a drop of 15%. If I’d invested my £3k it would be worth £2,550 today. So I’d be down £450.
Naturally, I’m glad to have avoided that grisly fate, but what went wrong at Greggs? The rot started with a poorly received Q3 update on 1 October, as sales growth slowed. Many companies would be thrilled with a 10.6% increase, but this was down from first-half growth of 13.8%.
The board stood by full-year guidance and is relying on new openings and innovative products to drive sales. But on October 30 the Budget dealt another blow. Hiking employer’s national insurance and the minimum wage will hit Greggs hard, with more than 32,000 staff.
The nine analysts offering one-year share price forecasts remain bullish, setting a median target of 3,314p. If correct, that would mean a rise of just over 22%. Although there’s a wide range of forecasts, from a high of 4,040 to just 2,400. There’s also a trailing yield of 2.30%.
However, with a P/E of 21.38 times, I don’t think it’s in bargain territory yet. And that NI raid hasn’t even hit yet. I’m not ready to sign up to the cult of Greggs just yet. But I’ll keep watching.
