Greggs PLC's (LSE:GRG) new boss Roisin Currie is going to feel the pain in the coming months as it is squeezed by a mixture of elevated gas, oil and wheat costs from the war in Ukraine and analysts are undecided on its longer-term prospects.
Alongside its full-year results the baker warned that surging levels of cost inflation would crimp profits in the coming year.
In view of the fall-our from Russia’s invasion of its near neighbour, analyst Clive Black at Shore Capital said he felt Greggs was bang in the middle of the “maelstrom of Ukraine related cost pressure” of elevated gas, oil and wheat costs, which he said “could be particularly challenging for a company like Greggs, which is very value orientated and, as such, has many customers that may now start to really feel the pinch”.
While Greggs may find some customers ‘trading down’ from higher-priced rivals as real incomes become further squeezed, Black said “all boats respond the tidal forces” and other customers “may resort to home prepared food, which either way is not good for mix”.
Hence, Black said he worries about the scope for Greggs to build sales volume at this time of inflation nor to raise prices enough to recover the costs increases due to the steep level of inflation.
Analysts at AJ Bell said they thought Greggs has sufficient pricing power and “could probably push up prices further without hurting demand” but is instead playing a long game.
“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,” said AJ Bell analyst Russ Mould.
“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.”
Greggs has already had to trim its range due to ingredient shortages, and now labour shortages might stunt its growth ambitions, noted analyst Ross Hindle at Third Bridge.
Looking at sales in the past year, the group’s growth came from an increase in shop number, while like-for-like sales were down 3.7% compared to pre-pandemic 2019,
“More shops may have meant more sausage roll sales, but a lack of like-for-like growth is now a concern,” said Hindle.
“With the wow-factor of its vegan offerings now a distant memory, Greggs needs to provide more innovative and broad meal and drink choices, our experts say.”
“Greggs’ clothing partnership with Primark has certainly been well received by Greggs superfans. However, the longevity and success of such an initiative is yet to be seen as the offering comes more as a marketing play rather than a growth venture.
“Supply chain issues, cost increases, and labour shortages all pose significant and persistent risks for Greggs. Investors will be studying how Greggs manages its cost increases, which could turn out to be double-digit, in order to protect its margins in the months ahead.”
Greggs shares fell over 8% in early trading but by time for lunchtime steak-bake they were almost flat for the day at 2,220p.
Shore Cap’s Black said the equity was trading at “frankly ridiculously elevated levels in our view”, having topped 3,400p at the turn of the year.
Though the stock has eased back by a third in the year to date, he noted that the company has stepped up its capital expenditure plans as part of the punchy target to double revenue to £2.4bn by 2026, and also has “considerable” operating lease liabilities.
What's more, boss Roger Whiteside is retiring after a transformational decade in charge and handing over to Currie, who has never run a FTSE 350 company before, though she knows the company as well as anyone, having joined in 2010 from a previous role as Asda's people director.
“Hence, given management’s cautious comments on the cost environment, our general worries on current consumer matters in the UK, and the scope for Greggs to have set unachievable medium-to-long-term targets … we reiterate our ‘sell’ stance, noting that the share are no longer in the ‘sell stratosphere’.”