Value sausage rolls-to-sandwiches seller Greggs (GRG) warned investors it doesn’t expect to deliver ‘material profit progression’ this year as cost pressures are now more significant than flagged just two months ago.
The news sent shares in the high street baker down 9% to £20.80.
BIG APPETITE
The profit warning overshadowed tasty full year results from the resilient food-on-the-go chain, which delivered a big bounce back from the pandemic amid voracious appetite among consumers for the Greggs brand.
Sales for 2021 were up on pre-pandemic levels and the current year has started well with two-year like-for-like sales growth of 3.7% in the first nine weeks of 2022.
For the year ended 1 January 2022, Greggs’ total sales were up 5.3% on 2019 levels to almost £1.23 billion and the retailer swung to a pre-tax profit of £145.6 million versus 2020’s pandemic-induced £13.7 million loss.
INFLATION SET TO BITE
Roger Whiteside, who steps down as chief executive to be replaced by Roisin Currie in May, insisted Greggs has ‘started 2022 well, helped by the easing of restrictions’.
Unfortunately, Whiteside also warned ‘cost pressures are currently more significant than our initial expectations’, with inflation impacting ingredients, energy and labour costs.
‘Given this dynamic, we do not currently expect material profit progression in the year ahead’ he added.
Despite these near-term pressures, Whiteside continues to believe that ‘the opportunities for Greggs have never been more exciting.
‘Our investment over recent years has left the business well-placed to move quickly as the economy recovers and we drive our ambitious plans to become a larger, multi-channel business.’
Greggs is not only targeting the opening of 150 net new outlets a year for the medium term, implying scope for a UK portfolio of at least 3,000 stores, but will also refurbish some 200 outlets this year.
In addition to physical store expansion, Greggs plans to extend late opening with delivery service from a total of 500 shops to meet the potential demand of the evening trade.
THE EXPERTS’ TAKE
Julie Palmer, partner at Begbies Traynor, said: ‘Consumer appetite for Greggs is returning after the chain famed for its sausage rolls took a pasting thanks to lockdowns and advice to work from home during the pandemic.
‘Sales for the year are up on pre-pandemic levels, but the good news may not be long-lived. Rising costs of ingredients, energy and wages are set to take a bite out of the recovery with margins being eaten away.
‘Soaring inflation is a major issue but it might play into Greggs’ hands now that people are back in the workplace - or at least going into the office more often. With their purse-strings drawn tighter thanks to rocketing energy bills, the public may turn to the less costly comfort foods offered by Greggs, rather than pricier alternatives.’
AJ Bell investment director Russ Mould explained that Greggs is being ‘overly cautious and warning of no material profit growth this year.
‘That is going to be the case for many retailers. In fact, simply managing to match last year’s profit might be turn out to be a good result for retailers in 2022 given the headwinds to earnings.
‘Even though the cost pressures and demand risks might seem painful now, Greggs has its eye on the longer-term prize which is having a much bigger business. It is laying the foundations by strengthening its infrastructure to support greater store numbers, longer opening hours and more delivery orders.
‘Weaker retailers might halt such investment in trouble times, so the fact Greggs is ploughing ahead says a lot about the resilience of its business.’
DISCLAIMER: Financial services company AJ Bell referenced in this article owns Shares magazine. The author of this article (James Crux) and the editor (Ian Conway) own shares in AJ Bell.
