No. of Recommendations: 1
Greggs PLC issued a profit warning this week and the share price immediately fell 15% before recovering to a 12% decline as of today.
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Mungofitch asked a good question on the other thread:...
Wow, thanks for the excellent additional colour on the situation. I am entirely happy to admit that I know almost nothing bout the firm, other than seeing the signs here and there when in London. And the flattish profits : ) So even if your comments are obvious to someone well informed, that definitely isn't me.
On the subject of your last line about the risk of expansion:
There is hope for any "concept" chain that over-expands. If they were rational, they would just stop when the economics of incremental sites stop making sense. Switch the money they're generating from capex to buybacks (if the stock is cheap) or dividends (if it isn't). But that seems vanishingly rare. So many chains expand till they pop, often resorting to acquisitions which burn value and muddy the financials enough to make it not so obvious.
Instead, to me the bigger risk is that the client base falls out of love with the offering, at least at the margin. For some chains, there is a fashion/novelty aspect which can come and can go. Or simply that something shinier comes along that grabs their focus. Think of all the chains that were once the go-to place, but are no longer.
I'm not saying that any of that applies to Greggs, who (as mentioned above) I know little about. (I don't even know why they don't have an apostrophe). Just what I've seen from watching many chains come undone after being growth darlings with all the right numbers. In this case, the good news for a prospective investor is that they aren't overvalued--one is not pre-paying for a rosy future that has not yet come to pass. If real earnings per share stayed right where they are, a person wouldn't do badly.
Jim
