Greggs share price: Record profits tempered by ongoing inflationary challenge

Greggs delivers record profits in 2022

Baker Greggs delivered record sales and pretax profits in 2022 as it continued to open new stores while driving more traffic to existing outlets by keeping stores open later in the evening, growing its delivery offering thanks to its move onto takeaway platform Just Eat, and through its app-driven click-and-collect service.

Total sales jumped 23% as a result to £148.3 million, with like-for-likes at existing stores rising 17.8%.

Pretax profit increased at a slower rate of 1.9% as cost inflation remained a headwind, but this still hit a new record of £148.3 million and beat the £147.5 million forecast by analysts.

Greggs sees sales growth accelerate in early 2023

We saw further evidence that demand remains healthy this year after discovering that like-for-like sales were up 18.8% in the first nine weeks of 2023. That should provide confidence considering this has accelerated from the 18.2% we saw in the final three months of 2022.

Plus, Greggs plans to open another 160 new company-managed stores in 2023 while refurbishing 150 existing outlets. Greggs ended last year with 2,328 shops in its portfolio and is aiming to grow this to well over 3,000 ‘over time’, which will also require it to bulk-out its supply chain. 

Markets believe Greggs will continue to grow its topline measures in 2023, albeit at a slower rate with analysts penciling-in sales growth of 10.5% and like-for-like growth of 6% this year. Meanwhile, consensus figures forecast pretax profits will grow 9.5% to hit another record high.

However, consensus figures for profit this year could be at risk, or at least geared toward the downside, after Greggs warned that cost inflation would remain a problem in 2023.

‘Cost inflation will continue to be a challenge in the year ahead, driven particularly by pay awards and energy costs, but we are confident that our outstanding value proposition will remain compelling as customers look to make their money go further. As such, we remain confident in the prospects for the business in 2023,’ said chief executive Roisin Currie, who took over at the helm of the baker last year.

Total costs were up almost 25% from the year before in 2022 but some areas will experience an even bigger rise this year. For example, it increased wages by around 4.9% in 2022 but said this would accelerate to about 8% in 2023.

‘Looking forward we expect overall input cost inflation in 2023 to be in the range of 9% to 10%,’ said Greggs.

Inflation remains a headwind, but Greggs has greater visibility of what to expect going forward compared to what it experienced in 2022. For example, food and packaging – representing about one-third of total costs – have been locked-in for the next four to five months. Its electricity costs are fixed until later this year, and it has already provided clarity over its single biggest cost as it prepares for wages to rise about 8%.

Still, there are some benefits. The inflationary environment is also enhancing its proposition that is underpinned by value, which is resonating with more price-conscious consumer in the current environment. That should allow Greggs to keep powering ahead, with investors hoping it can gain market share as independent stores have a tougher time coping with inflation and higher interest rates. That is also likely to be opening up prime locations for Greggs to occupy, having moved into major traffic hubs like Leicester Square in London and airports in Birmingham and Liverpool.

Greggs raises dividend

Greggs paid a final dividend for 2023 of 44.0p, which means the total full year payout has risen to 59.0p from the 57.0p ordinary dividend paid in 2022 (although this was down when the 40.0p one-off special dividend paid in 2022 is taken into account).

The dividend looks safe considering earnings per share came in at more than double what it is paying out. Greggs has a progressive policy that aims to grow dividends in-line with earnings.

Where next for the Greggs share price?

Greggs shares were volatile in early trade but are down 1.4% after settling down this afternoon.  

The Greggs share price has been rising in a parallel channel for over five months and this remains intact. That means that a move toward the 3,000p mark remains an achievable goal. To get there, we would want to see shares first set a new 2023-high by moving above 2,820p and then recapture 2,900p, representing the floor we saw in the second half of 2021.

Notably, the 11 brokers that cover Greggs see over 8% potential upside from here but think climbing to 3,000p could be a stretch considering they have an average target price of 2,982.50p, according to data from Refinitiv.

The floor of the parallel channel should hold as it has since late September, but the 50-day moving average is there to provide a safety net should it break lower.

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