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Greggs - double-digit sales growth, inflation expected to ease

Greggs reported first-half sales of £844.0m, up 16% on a like-for-like basis. The start of the year was flattered by easier comparisons with

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Greggs reported first-half sales of £844.0m, up 16% on a like-for-like basis. The start of the year was flattered by easier comparisons with last year because of the omicron variant of COVID-19. Overall, store openings, longer opening hours and digital expansion all contributed to growth.

Higher sales helped underlying pre-tax profit rise 14.2% to £63.7m. Cost inflation was around 11% for the half, and is expected to ease from here. Guidance for the full year is 9%.

The group generated free cash of £19.8m, down £39m as investment ramped up. There was a net debt position, including leases, of £165.8m.

The board proposed a dividend of 16p, up 6.7%, and still expects to see sales progress further over the year.

The shares fell 3.5% in early trading.

View the latest Greggs share price and how to deal

Our view

We continue to be impressed with Greggs and strong trading continued over the first half.

The number of shops is set to rise to 3,000 over the next few years, the menus and stores have had a reset and trading is holding up well. Relying on high-street shoppers and commuter traffic isn't a sustainable plan, so we're particularly supportive of plans to increase its presence at travel locations (like train stations).

Greggs also plans to increase the number of shops that are franchises from 17% to around 20%. We're supportive of this model. Greggs isn't on the hook for day-to-day costs at these locations when compared to the company-owned sites. There are other growth levers too, including bolstering delivery services (it currently has a partnership with Just Eat), click and collect, and opening later to attract more evening customers.

There's a real opportunity at hand if it can win hearts and minds at a time when disposable income is tight, the evening food-to-go market is huge and an area Greggs has barely scraped the surface of.

We can't knock momentum, with double-digit growth over the half and trading continuing to hold up well into the new quarter. Performance early in the year has been helped by weak comparisons from the same time a year ago, thanks to Omicron, but still a strong showing. One of Greggs' key strengths is that it's a lower-value treat. That makes it more resilient during the cost-of-living crisis and is reflected in the increased use of the loyalty rewards scheme on the group's app. That could translate to longer-term repeat demand even when the economy smooths back out.

But Greggs does have some challenges to face. The cost picture is key and we were pleased to hear its tracking in line with expectations. 9% cost inflation over 2023 is by no means an easy hurdle to overcome, but the group's secured forward cover for food, packaging and energy costs up to early in the fourth quarter - cost visibility in this environment is key.

We continue to be impressed with cash generation, and along with a decent cash hoard on the balance sheet, there's plenty of firepower to fund future growth. Perhaps surprisingly for a business geared to growth, there's also a 2.4% prospective yield on offer to sweeten the offer. Though, no returns are guaranteed.

There's a lot to like about Greggs, literally and corporately, and we still see some upside over the long term, But as we saw with the market's slightly harsh reaction to what was a decent set of half-year results, a high bar's been set.

Greggs key facts

All ratios are sourced from Refinitiv. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.

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Written by
Matt Britzman
Equity Analyst

Matt is an Equity Analyst on the share research team, providing up-to-date research and analysis on individual companies and wider sectors.

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Article history
Published: 1st August 2023