GREGGS - how does it measure up?

Are you investing in Gregg's investing?

Dear reader

FTSE100?! Oak Bloke what’s going on! Why not another article on an unloved AIM stock? Well a few readers asked me to look so I looked. I like finding unloved value after all.

Greggs Plc (LSE: GRG) a story of pasties, pies and profits. And investment.

The full-year figures to December 31, 2024, landed last week, and underlying PBT up a tasty 19% to £189.8 million. Total sales hit £2.01 billion—an 11% leap—breaking the £2 billion crust, with like-for-like growth at 5.5%.

Net cash of £242 million (up 26%), and a dividend nudged 5% to 69p, yielding 2.2%. At £18.50 a share—down 40% and the P/E is just 13.5. Greggs have 2,618 shops and 226 new ones in 2024 (145 net of closures and relocations) outnumbering McDonald’s, KFC, and Burger King combined) and 90% of these are direct with 10% franchises and are developing an evening service, as well as deliveries such as via consolidator Uber Eats. The plan is to to grow above 3,000 shops longer term.

So, what’s the formula? Greggs has stretched its hypotenuse—new stores are the base, 140 more planned for 2025, while evening trade and delivery (10% of sales via Just Eat and Uber Eats) form the growth. App sales hit 13%, and they’re dishing vegan rolls to hipster crowd without losing the builders. So doubly appealing to hipster builders presumably? With 70% of Brits within a pie’s throw, it’s a British institution —and affected by Trump’s tariffs? Nah, local sourcing keeps it tight.

But there’s a kink—like-for-like sales growth’s shrinking: 7.4% in H1 2024, 5% in Q3, and a measly 2.5% in Q4. Management blames a “well-publicised” consumer slump over Christmas, with high street footfall flatter. I reckon everyone’s a bit down on Rachel o’Accounts and a bit crestfallen post election (it was meant to be so much better once we had the election). Or do people just like having a moan?

Let’s not forget the wall of £32bn spending being unleashed in 2025 by tax and spend Reeves. GDP growth is forecast to accelerate and Greggs should benefit. Lots of spend is going into things that will cost (e.g. minimum wage rises) but benefit people spend their higher wages on more Greggs.

This is the crux. Improving revenues smashes into deteriorating costs. This is the rogue variable. Wages, flour, and energy are rising faster than a pie in the oven, and April’s National Insurance hike with 30,000 staff—mostly shop floor—clocking a £519 million wage tab in 2023 (60% of selling costs), it’s a chunky slice.

Rachel’s October Scare

A 6% rise is chalked in by Greggs so that would be a -£109.1m rise on -£1819.1m of operating costs. Will that 6% fall on ALL operating costs? Let’s assume it’s a yes.

If you don’t the wage bill is ~£600m so 6% would be a smaller a -£36m impact.

Cost savings in 2024 delivered £10.6m. What could they deliver in 2025?

If you agree a 4% inflation price rise “doable” that adds £80m income.

So being a complete pessimist you could argue “Operating Profits could drop by over half to £90m” in 2025. A complete optimist would say, wage cost inflation of 6% minus the same savings in 2025 offset by targeted price rises, and further sales growth could lead to £270m operating income in 2025. (£195.3m -£36m + £10.6m + £80m + £20m).

Personally I could see an operating profit of £200m in 2025 which is a slow down of growth comparatively, but a £140m net profit pre exceptionals seems very achievable.

Even at that personal view it’s 13.5X the market cap.

While an optimist would arrive to a 9.7X Price Earnings (£270m-£15m finance cost-25% tax = £195m net profit). The pessimist? 25X.

Medium Term Investment

Automation and self-service kit could trim staff in new stores, will we see Gregg-Bots soon? Greggs say touchscreen ordering is coming. Its peers already have this so nothing earth shattering. Much of the focus for automation has been back office and supply chain and Greggs opened a fourth manufacturing facility and operates a number of distribution centres capable of supporting 3,500 shops (30% expansion capacity). An upgraded ERP SAP S4HANA connects every POS terminal right the way through for streamlined processes supported by AI and analytics.

I notice also other investment cost is going straight to the P&L (e.g. Admin expense 4.9% up from 4.6% “due to reinvestment in technology”. Moreover D&A is -£79.5m while aquisition of PP&E in 2024 was £240m and forecast to grow in 2025.

In fact I fell off my chair when I realised it’s made over £0.5bn of net investment in 5 years (nearly £1bn gross). More on that later.

Marketing Investment

Rapturous riots of flavour and succulent…. Greggs joined the Christmas advert mob and recruited Nigella to deliver the innuendo-laden message in one or both hands. Smirk. Like the Viz Comic for the sophisticated Nigella is a great sport.

Greggs is investing into its marketing and using various opportunities to feature with the Glitterati - Olly Murs and various “it people” so essential for maintaining that “trusted brand” image.

Greggs is investing into innovation with its App and points scheme, introducing made-to-order fish finger sandwiches and wraps “have it your way”

Its 10% profit share, 7% pension contribution, energy efficiency programme and feed schools programme warms the cockles too. Not too much to worry about from a CSR point of view.

Profit on Disposal

£16.1m of proceeds led to a £14.1m gain on a £2m asset with the Twickenham site. Land and Buildings is depreciated at 2.5%-5% per year when the reality is the land element at least is appreciating. They ain’t making it no more. Evidenced by the exceptional gain. There was £192m of Land in the 2023 accounts.

It would appear all shops are leased (£63m cost and ~2200 non-franchise shops is ~£28.5k average rent per shop per annum - which sounds about right to me)

Conclusion

Buy, sell, or hold?

Well I can’t sell because I don’t hold. Would I buy? I must say I’m intrigued. The price drop appears to be an opportunity. Consider that at its Covid lows it was 20% cheaper than today - and that year revenue was 2.5X lower (and down 33% from 2019), and Gregg’s lost -£13m net profit that year.

The share today costs you £18.50. The same share in 2020 at Covid Lows would’ve cot £14.50.

Would you pay 25% more today for a business that made and probably will make £150m net profit instead of -£13m (in 2020)? Where back then the forecast outlook for 2021 was a potential (and actual) bounceback £120m profit? A business where the NAV is £5.58 per share as at 31/12/24 instead of £3.17 back in 2020?

2020, when evening trade was just a strategic idea? When the shop estate was 500 fewer than today?

Now for the kicker. Compare Greggs 2025 vs Greggs 2020 and consider how much investment has gone into driving down cost and improving efficiency (assuming you believe building factories, distribution centres and upgraded ERP with AI will benefit the business and drive that efficiency)

£0.55bn net or £0.91bn gross of difference.

Let alone the accumulated value of the brand espoused by the sumptious syllables of Nigella. It looks a great buy to me, and buy rhymes with pie.

Regards

The Oak Bloke

Disclaimers:

This is not advice - make your own investment decisions.

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