Subject: Re: Greggs PLC (GRG.L)
Mungofitch thanks for highlighting your two main concerns and your earlier question. It has been useful to revisit my thesis, given recent developments.

I appreciate you are not in the U.K. and are not doing a deep dive on the company yet. I’m not either but will admit to having an interest in it and probably a reasonable enough understanding to realise that the outcome from here is matter of opinion.

Over expansion risk. Agree 100% that this is a trap most management teams eventually fall into in a business like this. It’s just so easy to kid yourself for a couple of years, stretch assumptions etc. It get harder to find good locations with required footfall. You have this great trick that worked so well for decades making you 25% returns on new openings. It’s mesmerising. You have all these departments and positions whose job it is to do exactly that - open new shops. You are telling the market you are a growth company. All kinds of biases at work.

The only type of person that can prevent a firm like this falling into the over expansion trap is the CFO. He has to stay rational and conservative. He has to recognise when the rapid expansion time is up and will face strong resistance usually. The fact that the CEO is female is perhaps an advantage here, as she may not have the male risk taking inflated ego. My intuition on this very important risk is that the Greggs CFO gets it. They have these internal return hurdle rates. He explains in detail how he thinks about capex. If you get your 10% earnings yield and get interested enough to go through the filings, you will be impressed. I have only skimmed them but genuinely found the attitude to capex and returns of capital very refreshing. I would also add that not only do they have a large dividend payout ratio, over the years they have also done a number of special dividends. They have no debt. The expansion to date was slow and measured, with lots of capital being returned to shareholders. U.K. companies don’t seem to do share buybacks like American companies for whatever reason. Maybe cultural. So I’m not optimistic they would do a buyback, which would be great at the current discount to IV. But who knows maybe this CFO’s focus on returns on capital suggests he has been paying attention to Mr Buffett. (That is probably wishful thinking.)

But I would conclude WRT expansion, it’s a judgement call on management.

Regarding the risk of falling out of fashion in the medium to long term. I’m less worried about that. Everything I see at Greggs points to an incredibly vibrant organisation with a strong culture and management that know what they have to do to keep their place in the minds of U.K. consumers.

My final point is this. On both of these two fundamental factors, that will absolutely determine shareholder returns from here - if Greggs started to slip towards either, or both of those common traps, red flags would emerge and there would/might be time to abandon ship quickly.