Greggs (LSE: GRG) is known for its low prices. But until recently the FTSE 250 company’s share price has bucked this trend, earnings a premium valuation for the food-to-go operator.
That’s changed. Shares in the sausage roll specialist have fallen by more than 20% so far this year. The stock’s now 30% below the 52-week high of 3,250p seen in September 2024.
What should investors do? Is this fall an opportunity to consider buying – or a warning of worse to come?
2025 looks uncertain
Sudden share price dips like we saw last week are usually caused by a profit warning. That’s when a company tells the stock market its profits are expected to be lower than previously expected.
Has Greggs issued a profit warning? Not quite. But I think it came close last week. In a trading update on 9 January, the company said its 2024 results would be “in line with the Board’s previous expectations”.
However, management sounded less certain about the outlook for 2025. CEO Roisin Currie warned that “lower consumer confidence” was affecting high street footfall and customer spending.
Currie also warned that rising National Insurance and higher wage costs would add to Greggs’ cost base. The company employs over 30,000 people in the UK, most on lower wages.
If Greggs is forced to put up prices to protect its profits, hard-pressed consumers could cut back even further. I don’t know how likely this is – perhaps demand will recover when the increase to the Minimum Wage kicks in from April.
Growth opportunity?
Currie remains confident that Greggs has a significant growth opportunity in the UK. She’s planning to add 140-150 shops to the company’s store estate next year. That could take the total number to over 2,750 – similar to Coca-Cola-owned Costa Coffee, which has over 2,700.
City analysts are still bullish on the Greggs story. Broker forecasts for 2025 have fallen slightly but still suggest profits will rise by 5.5% to 142p per share this year. Looking further ahead, earnings are expected to rise 8% to 153p in 2026.
These estimates price Greggs shares on 15 times 2025 earnings, with a 3.4% dividend yield. My research suggests that’s cheaper than they’ve been for most of the last decade.
What I’m doing
I still think this is a quality business, with above-average profitability, a great brand and a popular product. But I’m worried that Greggs may be getting closer to maturity, as it keeps opening new stores. How many more are really needed?
I think there’s a chance that Greggs’ slower growth could become the new normal. That might make it harder to justify a premium price for the shares.
Given the uncertain outlook for the year ahead, I’m going to stay on the sidelines for a little longer and await further news.
This post was originally published on Motley Fool
