Half year sales of £694.5m were 27.1% higher than last year, with like-for-like (LFL) sales up 12.3% compared to pre-pandemic levels. Despite the higher revenue, pre-tax profit was broadly flat at £55.8m, reflecting the re-introduction of business rates after a grace period during the pandemic, higher VAT and increased input costs from inflation.
Looking ahead, the group said LFL sales in non-franchised shops were 13.1% higher in the four weeks to the end of July, but acknowledged "there are considerable uncertainties in the economy". Greggs' expectations for the full year are currently unchanged.
An interim dividend of 15p was announced, in-line with last year.
The shares rose 2.2% following the announcement.
View the latest Greggs share price and how to deal
Our view
Greggs is a very different beast to a few short years ago. The bakery chain now has well in excess of 2,000 shops and is bang in the middle of a swanky strategy shift.
This includes bringing the total number of shops to 3,000 over the next few years, refitting shops and changing the menu. 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 is also increasing the number of shops that are franchises from 17% to 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), and opening later to attract more evening customers. The latter is something we'd like a bit more detail on, as we're dubious about how successfully the Greggs brand can attract dinner guests. But with a menu refresh on the way, we'll reserve judgement for now.
The group has successfully repositioned its brand into a slightly more premium bracket, feeding into double digit sales growth - although some of that's against a very low base when lockdowns badly dented trading.
For all the positives, Greggs faces some real near-term challenges. Higher food, packaging and energy costs means cost inflation for the full year is expected to come in at 9%, and we wouldn't be surprised to see this revised higher. The rebranding may mean that some of this can be passed onto customers. But the extent to which it can do this without hurting volumes is lower than higher-end, or even supermarket, rivals, in our opinion.
A net cash position of over £145m means Greggs can stomach some disruption, but inflation could dent profitability in the medium term. As could a sharp economic downturn, when a shop bought lunch becomes a luxury that people decide not to spend on.
The net cash position also helps underpin the dividend yield of 3.0%, and allowed the group to shell out a generous special dividend last year. A return of special dividends shouldn't be assumed, especially because Greggs stretched itself quite thin to pay it. Instead, the group's hinted it's returning to a meatier ordinary dividend policy - but as ever, no dividend is ever guaranteed.
There's a lot to like about Greggs - literally and corporately. The valuation has come down some way since the heady days of the vegan sausage roll campaign too. While we admire Greggs' strength, there are some inflation-linked headwinds to be expected in the medium term.
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.
Half Year Results
Greggs opened 70 new shops in the period and closed 12. It expects to open around 150 for 2022 as a whole. 401 of 2,239 shops are now franchised. The group's increased its presence in central London and rail stations, to decrease its reliance on traditional town-centre locations, in-line with the strategy. Opening hours have also been extended, and delivery and click and collect initiatives are progressing.
The group said like-for-like (LFL) growth rates are starting to return to more normal levels, as the first quarter results were flattered by comparisons to the previous year, when some restrictions were still in place.
There was significant cost inflation, driven by food, packaging and energy. Distribution and selling costs jumped 31.6% to £339.3. Cost inflation for the full year's expected to be around 9%, but this isn't guaranteed.
Increased investment in the strategy, including additional pizza-making capacity, saw capital expenditure rise 78.3% to £41.9m. Greggs generated free cash flow of £56.9m, compared to £102.9m at the same time last year, when the group reined in spending.
Greggs had a net cash position of £145.7m (2021: £118.3m), which is higher than usual while the group funds investment in growth. Including money owed on leases, there was a net debt position of £145.2m.
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.
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