10th Jan 2024 10:54
(Alliance News) - Greggs PLC on Wednesday said sales rose in the fourth quarter and full year, with analysts saying this was built on its own initiatives and being a "very well-run national treasure".
The Newcastle, England-based bakery chain reported that its total sales increased 20% to GBP1.81 billion for the full year, from GBP1.51 billion the year prior.
The firm said company-managed shop like-for-like sales in 2023 increased 14% during the period, while they increased 9.4% in the fourth quarter, as transaction numbers continued to grow but price inflation had a negative effect.
Greggs said the increase in sales shows the popularity of its brand, as it notes that it is making the brand more accessible via extended trading hours and digital channels, with Uber Eats delivery having been rolled out to 710 shops, alongside the existing Just Eat service.
The company noted that it opened 220 new branches during the year, with 33 closures and 42 relocations giving a net shop openings figure of 145. It has 2,473 shops in total.
Edison noted that this was a record number of new store openings, alongside new production facilities being opened in 2023.
"The encouraging thing about Greggs' solid fourth quarter showing is it is built on many of the company’s own initiatives – making it very much the master of its own destiny. The extension of opening hours at its sites, product innovation, a more efficient supply chain and improved delivery options have all been material factors in Greggs' ability to keep serving up an impressive performance," said AJ Bell analyst Russ Mould.
"Even the slight negative in the update contains a grain of positivity for customers, with the lower sales growth in the final three months of the year largely driven by the company putting the brake on price increases thanks to easing inflationary pressures."
Shore Capital said that Greggs extending its trading day "beyond its strong breakfast and lunchtime proposition has been spoken about as a key driver of growth for management."
"Management does not disclose how much of the group’s trade is accounted for by the evening activity in company-managed shop sales in this update, noting it was 8.8% in [the third quarter] (pizza seems to be driving the evening offer) nor the participation rate of company-managed shop transactions scanned on the Greggs app," said Shore analysts Clive Black and Darren Shirley.
"However, it does reveal that 710 of its stores were delivering on the Uber Eats platform at the year-end, bolstering the delivery activity of Just Eat (note margin is 'given away' with such trade)."
At December 31, Greggs said it had GBP195 million in net cash, up from GBP192 million previously. Shore labelled this balance sheet "very strong", noting that Greggs management "speaks to such resources supporting the ongoing growth of its retail real estate".
"We are pleased to see inflationary pressures easing with this well-ran company having good visibility around key costs, noting the [around] 10% increase in the UK National Living Wage from April 2024 (about 40% of turnover) and business rates too," said Shore analysts.
"Hence, no change to guidance is stated by the company, which may lead us to tweak up our [pretax profit] estimates for 2023 and 2024 to GBP163 million & GBP187 million respectively. We are 1-2% below consensus for both financial years. We are unsure if the market was expecting any sort of beat ahead of this update."
In 2022, Greggs posted a pretax profit of GBP148.3 million. Looking ahead, Greggs left its full year expectations unchanged, and said it expects to open between 140 and 160 new stores in 2024.
It also plans to expand its supply chain capacity in 2024, according to Chief Executive Officer Roisin Currie.
"It is clear that the company expects growing demand for its products, and continued consumer recovery, in 2024," said Edison analyst Russel Pointon.
AJ Bell's Mould commented: "Given value is a key component of the Greggs proposition, this ability to keep a lid on its prices is really important and points to an encouraging outlook for 2024. It is also underpinning the decision to open 160 new sites through the course of the year.
"Greggs is a well-run business with a keen sense of what its customers want and clear levers it can pull to augment growth. As such, it is little wonder investors have marked the shares higher today."
Shore kept its rating for Greggs at 'hold', setting a price target of 2,474 pence. This represents a 6.3% downside to Greggs' current stock price, although this is after this morning's 6.6% rise to 2,639.00p each in London.
"Greggs is a very well-run firm, a national treasure. It is deservedly admired by stock markets too and offers the prospect, with heavy investment in tow, of strong ongoing pretax profit growth," said Shore analysts.
"That said, the market also continues to support Greggs' traits and prospects with attractive equity valuation metrics; 2024 price-to-earnings ratio of around 18 times, an enterprise value against sales ratio of 1.4 times and an enterprise value against earnings before interest, tax, depreciation and amortisation multiple of 10.2 times, noting ex-leases the aforementioned cash balances.
"The dividend yield is sound at 2.6% (2.1 times cover) but with the material investment ongoing, the free cash flow yield is a low single digit. All in all, a fine company that the stock market likes and accords its equity with handsome absolute and relative valuation ratios."
By Greg Rosenvinge, Alliance News senior reporter
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