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Greggs (LSE:GRG) is one of the top UK stocks I know at the moment. Up nearly 425% over the past 10 years and 25% in the last 12 months alone, I reckon its stellar growth is going to continue.
Expanding fast with loyal customers
Greggs has been opening new stores rapidly, from 1,700 a decade ago to 2,400 today. That’s a 40% increase. Management has plans to take this even further, aiming to hit 3,000 stores in the coming years.
Also, the company reported like-for-like sales growth of 7.4% for the first half of 2024. This shows strong growth in its existing stores. So the business isn’t just growing via new locations, it’s becoming more popular where it’s already established, too.
Furthermore, its new Greggs app was scanned in 18.3% of transactions in the first half of 2024 compared to 10.6% a year before. This shows customers are fully engaging with the company’s brand, making use of promotional incentives for repeat business, and demonstrating loyalty.
Stellar growth and value
Greggs has an amazing three-year annual revenue growth rate of 30%. However, current analyst estimates suggest this could drop as low as 10% for the next three years.
Thankfully, I don’t think the slower growth will negatively affect the stock price. At a price-to-sales (P/S) ratio of 1.68, this is only slightly higher than its 10-year median. Such a reasonable valuation means it’s less likely to experience volatility.
The chart above shows the discrepancy here, with its P/S ratio down 11.5% from five years ago, but its total revenue up 55%. This means the market could be undervaluing the shares, and it’s a big reason why I’m thinking of purchasing some.
Greggs is going digital
As well as its app, management has also been investing in the company’s supply chain, including developing automation capabilities. Over time, this is likely to support its already strong operating margin of 10.5%. For comparison, the industry median operating margin in the restaurant industry is 4.8%.
However, Greggs is by no means the only company adopting a strong digital strategy. Rivals like Pret A Manger, Subway, and Costa Coffee all have strong apps and are investing in automation. Therefore, Greggs’ choice to invest in its digital infrastructure is more of a necessity.
Inflation could reduce demand
With the current cost of living crisis in the UK, it’s possible demand for pastries, soft drinks and other convenience food will lessen. And despite lower interest rates on the horizon, this can contribute to higher inflation, further reducing sales.
That’s because as the cost of borrowing goes down, more money enters the markets as more is loaned out. This can cause an increase in demand for many companies but often higher prices for the average consumer. I think Greggs is one of the more vulnerable businesses to a looming further inflationary period based on its target customers.
A potential long-term buy
Despite the risks, I’m bullish on Greggs shares for their decent valuation, strong historical performance and the company’s continued expansion plan. Management’s focus on transforming the business digitally is also a good indicator of its long-term strength. It could find it grows its profits from automation even amid inflationary pressures. Therefore, I’m potentially going to buy a stake in the company in the next few months.
