Looking at the FTSE 250, a glorified bakery chain certainly wouldn’t be at the top of my list if I had to guess which business is likely to deliver blockbuster returns. And yet Greggs (LSE:GRG) has developed a hungry habit of defying expectations.
Over the last 10 years, the stock’s jumped almost 360%. However, when dividend reinvestments are included, the total return’s closer to 500%. That’s the equivalent of a 19.6% annualised return, giving even mega investors like Warren Buffett a run for their money.
Despite this tremendous growth, the long-term potential for Greggs still looks promising. And with the shares sliding in recent weeks, I’m now eager to start adding some to my portfolio.
Craving for pastries
When it comes to the British breakfast market, Greggs is the king. Earlier this year, it overtook industry titan McDonald’s, snapping up 8.2% of the British takeaway market. As it turns out, the demand for tasty pastries like sausage rolls and pastys is pretty high in Britain. And the group’s penetration into the lunch menu with offerings like pizza slices has also resonated well with customers.
Even with higher prices, Greggs continues to ramp up its sales volumes, with revenue up 12.7% over the first nine months of 2024. At the same time, the expected cost inflation of raw materials is landing at the lower end of expectations. And the group’s expansion of its manufacturing capacity to support the targeted 3,000 stores by 2026 remains on track.
In other words, Greggs is still firing on all cylinders. And management’s subsequently reiterated its full-year guidance for 2024. Pairing that with a highly cash-generative and habitual business model, the firm enjoys a wide economic moat, in my opinion, even with fierce competition all around.
Every business has its weaknesses
While I’m bullish on this FTSE 250 enterprise, I can’t deny there are risks attached to an investment.
As of September, there are 2,559 Greggs shops around the country. As previously mentioned, management intends to expand its real estate footprint to 3,000 locations by 2026. The milestone seems more than achievable.
But with more locations comes higher self-cannibalisation risks where different stores end up taking sales away from each other resulting in lower growth with higher costs.
In other words, this growth lever may soon become ineffective. And while the firm’s begun introducing evening trading to bolster sales volumes, this too has its limits.
Another more recent threat stems from the new government Budget, which increased the minimum and living wage in the UK. Greggs employs over 30,000 workers, most of which are on this salary. Therefore, Greggs is looking at a new wave of wage inflation as of April next year that could eat into profit margins if it can’t pass on the cost to customers.
Despite these challenges, Greggs’ long track record of defying expectations makes me optimistic for the long term. That’s why I’m planning on capitalising on the FTSE 250 stock’s recent volatility and adding these shares to my portfolio this month.
This post was originally published on Motley Fool
