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the value of Greggs (LSE:GRG) shares fell sharply yesterday (January 9) after the group published a trading update for the final quarter of 2024. The headline figure was impressive. Total sales increased by 7.7% compared to the same period in 2023. But for those stores managed directly by the company, on a comparable basis, the increase was a more modest 2.5%.
The distinction between franchised stores (which represent around 20% of the group's footprint) and other premises is important. This is because, perhaps surprisingly, the baker makes a smaller margin from the stores he runs himself.
In 2023, Greggs recorded a trading profit margin of 20.7% in franchised stores (including other wholesale activities). Its own stores, which contributed 89% of revenue that year, recorded a margin of 15.5%.
I suspect this was the main reason the baker's stock performed so poorly. The company observed “moderate footfalls on High Street”during the quarter, which affects its own stores the most.
One person's trash can be another's treasure.
It's been a miserable week for shareholders. Over the five trading days ending Jan. 10, shares fell 23%.
But this could be a good opportunity for me. As Warren Buffett advises: “Be afraid when others are greedy. Be greedy when others are afraid.“
In fact, this echoes the advice given by RBC Capitalin December. The investment bank told its clients that “buy the dip”. At the time, shares were changing hands for £28.34p. Today, they are 24% lower. And he set a price target of £32.40, a 50% upgrade from the current value.
This optimism is based on the belief that the group is well positioned to cope with the higher labor costs the company faces post-Budget.
Income outlook
One positive aspect of its recent share price decline is that the stock's yield has increased.
That said, it's difficult to accurately estimate current performance. Over the past five years, the company paid three special dividends. Based on amounts paid in 2024 (105p), the yield is 4.9%. However, if payments made in 2023 (60p) are used, it is 2.8%.
However, remember that dividends are never guaranteed.
not so fast
Although Greggs continues to grow, the pace is slowing.
It's true that revenues have increased rapidly since the pandemic: the average annual increase, from 2021 to 2024, was 26%. But it slowed to 11.3% in 2024.
I think this is inevitable since the company does not have stores abroad. There is a limit on the amount of pies and sausage rolls UK consumers can eat.
But it means the group is vulnerable to a slowdown in the national economy. With its reputation for low prices, Greggs is ideally positioned to take advantage when revenues decline. Consumers are more likely to do “deals” when there is a shortage of cash.
However, it is not immune to a broader economic slowdown. Although the UK economy is expected to grow in 2025, recent data has cast some doubt on the accuracy of the most optimistic forecasts.
Therefore, after reviewing the investment case, I do not want to invest in Greggs. Its revenue and profit growth is slowing. And it depends too much on the UK economy. Personally, I think this week's dramatic share price pullback is an indication that other investors share my concerns.
