Profits this year from bakery food on-the-go retailer Greggs (GRG) are expected to be ‘materially higher’ than forecasts as like-for-like sales continue to accelerate.
Partly boosted by positive publicity surrounding its vegan-friendly sausage rolls, the surprise trading update has sparked a fresh swathe of buying by investors, driving Greggs' share price more than 12.5% higher to a record £20.14.
Forecasts for the year to December 2019 had already been upgraded twice before, and it would not be surprising if full year expectations are lifted again, if only modestly. Comparatives through the rest of 2019 will get tougher.
Shore Capital has placed its estimates under-review until analysts have had time to speak with management, but the broker had previously been anticipating pre-tax profit of £102m on £1.13bn of sales.
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Newcastle Upon Tyne-headquartered Greggs says its strong start to 2019 has been sustained with like-for-like sales up 11.1% in the 19 weeks to 11 May, marking an acceleration from the 9.6% growth witnessed in the opening seven weeks of the year.
A high-quality, cash-generative retailer with a formidable capital returns record, Greggs attributes the recent sales boost to the roll-out of its smash-hit vegan-friendly sausage rolls to all shops. In the early part of the year, growth was constrained by limited availability when demand outstripped supply due to publicity surrounding the early 2019 launch of the vegan sausage roll, met with an enthusiastic reception by health-conscious consumers.
Other products including Fairtrade coffee and other hot drinks are growing strongly, as is Greggs’ post-4pm pizza deal (offering a pizza slice and a drink for just £2).
Furthermore, Greggs, whose new summer menu features a new and improved vegan wrap, Mexican Bean & Sweet potato, insists sales of its traditional sweet bakery products ‘are also benefiting from the improved quality delivered by our investment in manufacturing centres of excellence’.
ANOTHER PORTFOLIO-NOURISHING UPGRADE
Following the exceptional level of like-for-like sales seen thus far, sales and underlying profits (before exceptional costs) for 2019 are both now expected to be ‘materially higher’ than management’s previous expectations, marking a third upgrade in 2019 to date and a fourth since late November.
Capping investor enthusiasm is Shore Capital, the broker continuing to question for ‘how long such strong like-for-like growth can be sustained’ and how many more stores can be opened in the medium term given that the company's 2,000-odd strong estate.
Edison Investment Research scribe Kate Heseltine says: ‘Sales have been boosted by the phenomenal success of the vegan-friendly sausage roll, which has been made more widely available across the stores following limited availability in the early part of the year.
‘As a result of the exceptional level of sales growth, management anticipates materially higher sales and underlying profits than its previous expectations. This is the fourth upgrade since late November, and testament to the company’s substantial progress with the brand transformation and savvy use of social media to engage with new and existing customers.’
Russ Mould, investment director at AJ Bell, comments:
‘Greggs is on a (vegan sausage) roll. Since the company launched its vegan-friendly snack in January 2019 it has upgraded guidance several times, unveiled a special dividend and added around £700m to its market value.
‘Not a bad contribution for a humble bit of pastry filled with a meat substitute. This is not the only reason like-for-like sales have been shooting the lights out at Greggs; investment in the range and quality of products it sells in recent years has turned it from a humble budget baker to a food-on-the-go destination for busy consumers.
‘The company is also doing a lot of the right things in the background, allocating capital to its manufacturing capabilities, improving its distribution infrastructure and getting a handle on back-office functions.
‘There is a danger that expectations are being raised too high by the current period of impressive growth, however there is nothing the company can do about that, all it can do is keep plugging away.
‘The success of the vegan sausage roll suggests there could be mileage in bringing out more meat-free options, though rivals will be eyeing Greggs’ sales here greedily and the company is unlikely to enjoy a monopoly in this area.'
