No. of Recommendations: 0
Greggs PLC issued a profit warning this week and the share price immediately fell 15% before recovering to a 12% decline as of today.
Mungofitch asked a good question on the other thread:
“I don't quite understand why, with sales up 63% in three years comparing 2024 to 2021, profits were up only 30% in the same three year stretch. Very superficially that suggests declining profitability on the incremental business. Is there a more subtle explanation for the falling net margins that I'm missing?” Answer - government rates relief.
Extracts from the profit warning that spooked the market:
• Trading results for the 26 weeks ended 28 June 2025
• Total H1 sales up 6.9% to £1,027 million
• 2.6% LFL sales growth, with good progress in May followed by slower growth in June as high temperatures impacted consumer purchasing patterns
• 87 gross new shops opened, 31 net openings, 2,649 shops now trading. On track to achieve 140 to 150 net openings for the full year
• The Board now anticipates that the full year operating profit could be modestly below that achieved in 2024
FT reports that “analysts at Barclays questioned how much of Greggs’ warning is related to weather hitting sales and how much is down to management’s concern about the outlook for sales in the second half of the year. “After a weak last quarter of 2024 . . . we can add a weather warning to the narrative,” said Richard Taylor, an analyst at the bank. Despite growing investor concern, Greggs has continued to open new outlets. In the first half of 2025, it opened 87 new shops and closed 56 shops, taking it to a total of 2,649 outlets. The Newcastle-based company said it remained confident about achieving 140 to 150 net openings for the full year.”
FT goes on to say:
“Greggs has been seeking to drive growth by broadening its product range beyond its core products of sausage rolls and pasties, introducing mint lemonade and an iced caramelised biscuit latte, as well as hot food options, including Mac and Cheese and fish finger sandwiches. The company has also been opening more of its outlets in the evenings. But as sales have softened, investors are “reasonably questioning whether the scale of the rollout is still appropriate . . . [there are] concerns of overexpansion”, said Taylor. Analysts forecast that Greggs has been dealing with a near £100mn increase in costs as a result of measures announced at last year’s Budget, including increases to employers’ national insurance. The company said on Wednesday that its expectations for cost inflation remained unchanged and that its mitigation plans would boost performance in the second half of the year.”
My instinct is telling me that there a few things that investors are keeping an eye on. Sales, new opening and margins.
Sales – so May was strong and then some softness in June. Was June truly exceptional due to the UK heat wave? Does that matter. I understand they made a similar comment in the winter due to bad weather. Global warming aside, the UK is going to get weather of all kinds over a twelve month period and I don’t think it’s particularly helpful to react to impacts of weather month to month. Internally management might of course want to rationalise how they are performing weekly and monthly e.g. what were the variables: promotions; new product hits and misses; unusual weather etc. But I guess as long term investors, while we don’t want to fool ourselves, it is not unreasonable to zoom out a little and see what the trend is over a longer period. Certainly, June softness could be the beginning of the end but surely it’s too early to conclude.
New openings – there does appear to be concern among analysts that saturation is becoming a problem. My perhaps, uninformed and simple thoughts are twofold. As I said before, I am impressed at the CFO’s focus on ROA in his presentations and reporting. Secondly, saturation absolutely will become a wall that they will need to eventually stop trying to climb. But they are not there yet and there is evidence for that. Looking at the overall firm ROE over the past 10 years the numbers are impressive but have come down from 28% to 20%. I would have thought that is normal enough as the low hanging fruit is picked first. But they are still high numbers.
2015: 28.8%
2016: 28.1%
2017: 26.9%
2018: 27.4%
2019: 20%
2020: -2.4% (Covid)
2021: 23%
2022: 21%
2023: 21.1%
2024: 20.3%
The company’s share price is down 45% from Sept 2024, perhaps reflecting the new lower growth phase and lower returns.
A review of Return On Incremental Capital (ROIC) would be useful but it has always been a measure I have found to be hard to know if the change is really due to the existing assets or the new assets. If you take 2024 the ROIC it is actually 62%. That certainly does not mean the newly opened shops in 2024 were amazing earners but is more to do with the existing shops doing well. The key return on asset measure are the calculations done by management on every individual major capital allocation decision, including the hurdle rates and managements judgements and avoidance of deluding themselves. The lack of major restructuring costs is evidence that they know what they are doing to date.
Management comment from 2021 annual report “For investments in new shops we target an average cash return on invested capital of 25%, with a hurdle rate of 22.5%, over an average investment cycle of eight years.” Couldn’t find this comment repeated in the 2024 report…
Margins – Mungofitch’s point is that in the 3 years to 2024 sales are up 64% but PBT is up only 28%.
The following is an extract from the 2021 annual report: “The sector-wide business rates relief for retail, hospitality and leisure businesses temporarily reduced costs by £14.9 million in the first half of the year.
If that £14.9m government funded rates relief was taken of the PBT for 2021 (it does not appear to have been reported as an exceptional item), then the 3 years to 2024 sales are up 64% but the PBT is up only 41%. That seems to be the main reason. Covid probably played a role too in all kinds of ways.
The business has certainly had margin pressure over recent years with food cost inflation, energy, labour costs. And more pressure from higher national insurance taxes from April 2025. On a positive note the investment in food processing and manufacturing facilities should help with this and hopefully they can pass on some of the increases to customers eventually. My instinct about pricing power and inflation is that we can be hit with sharp increases but we can’t just pass that on to the customer immediately. Better to gradually increase selling prices over time. I could be wrong about that but would expect these guys to be super sensitive to sales volumes and they would know that if they suddenly added 20% to the price of a sausage roll, volumes would decline and that would be completely against the grain.
Looking at margins over a longer period of 10 years it looks quite encouraging. Below are PBT before exceptional items.
2015: 8.7%
2016: 9%
2017: 8.6%
2018: 8.7%
2019: 9.8%
2020: -0.9% (Covid)
2021: 12.5% (rates relief)
2022: 10.2%
2023: 9.5%
2024: 9.7%
Profit per shop:
£43,051 in 2015
£56,000 in 2019
£70,243 in 2021 (rates relief)
£66,323 in 2022
£69,430 in 2023
£74,981 in 2024
Conclusion – it’s a fine little business and cheap. Risk of over expansion. Higher taxes from April 2025. Soft sales in June 2025 is hopefully not the beginning of the end!!!
