Disappointing trading releases can sometimes be like London buses. There’s not a single one in sight, but then suddenly two come along at once. This been the case over at Greggs (LSE:GRG), whose share price slumped again following another weak trading statement.
It’s disappointing to me as someone who only opened a position in the baker in November. But I didn’t get down in the dumps and rue my bad fortune.
Not at all. A calm head prevailed, and I increased my stake in the FTSE 250 company instead. Here’s why.
Sales slowdown
Troubles persist across the retail sector as the cost-of-living crisis endures. Not even Greggs, with its famously low-cost menu, has been immune to the pressure.
Full-year financials last week (9 January) showed revenues rise 11.3% to all-time highs of £2bn. Like-for-like sales growth in 2024, meanwhile, was 5.5%.
While these are respectable numbers, revenues missed estimates thanks to a sharp slowdown in the final quarter. Sales were up a more modest 7.7% and 2.5% on a reported and like-for-like basis due to what the firm described as “more subdued high street footfall“.
It’s perhaps no surprise that the market was spooked. As I say, Greggs released disappointing trading numbers before last week’s update, too, when — two months ago — it advised of a sales slowdown in quarter three.
However, I feel the scale of Greggs’ share price plunge is hard to justify.
Setting a high bar
I’d argue that Greggs is currently a victim of its own success. In recent years, investors have got used to the firm setting a high standard with impressive trading releases. So anything other than sparkling trading numbers are met with glum faces.
While 2024’s numbers were disappointing, the significant decline in Greggs’ share price, reaching its lowest since November 2022, seems excessive in my view.
Yet this comes as little consolation to me as an investor. As they say, the market is always right, and I’m still left nursing big losses last week regardless of why the baker sold off.
What matters is how I react. And I think Greggs’ shares are too cheap to ignore following their plunge. So I bought more.
Following last week’s price collapse, Greggs shares now trade on a price-to-earnings (P/E) ratio of 15.3 times. This pulls it even further below its five-year average of 23.4 times (excluding pandemic-hit 2020, when profits were smacked).
Growth hero
I believe this is an attractive valuation for a company that still has exceptional growth potential.
For one, the firm’s long-running and highly successful store rollout programme has plenty more to deliver in the coming years.
The firm had 2,618 stores in operation at the end of 2024, which is still well below its target 3,500. And the business plans to build its presence in potentially lucrative locations like train stations and airports.
Aside from this, the chain also has plenty of room to grow as it expands its click and collect and delivery services, and doubles down on evening trading. The latter alone has considerable growth potential: today, only half of the firm’s stores remain open beyond 7pm.
Like Warren Buffett, I love buying quality stocks when they fall in price. I’ll consider buying more Greggs shares soon if they remain at current levels.
This post was originally published on Motley Fool
