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Near the beginning of the year, I sold my shares in Greggs (LSE: GRG). My brokerage account tells me I flogged them for £21 each, which was 25% less than they had been just two months prior.
Now, I’m thinking that was a timely move, as Greggs has slumped to £15.60. Indeed, the FTSE 250 stock’s down 10% in just the past week, meaning anyone who invested £10k seven days ago would already be a grand down.
Why I sold
The blame for the latest slump lies with the first-half report the bakery chain served up Tuesday (29 July). Before getting to this, I want to explain why I sold my shares, as Greggs didn’t do much wrong.
The reason I pulled the plug on this investment mainly related to the dire state of the UK economy. Some high streets are in a dilapidated condition, with declining footfall and a gloomy feel.
Admittedly, Greggs has done well to offset this by moving into travel hubs like airports and train stations, which can be more vibrant. But I fear the high street will act a bit like a handbrake on like-for-like shop growth moving forward.
Another thing I feared was that the higher staffing costs placed on employers by the government would have a chilling effect on the economy. I suspected unemployment would start rising (it has).
To offset higher costs, the company had to raise prices, which I worried might put off some cash-strapped consumers. Call me stingy, but I turned my back on McDonald’s breakfasts a while back after the price of a hash brown rose to what I considered a ridiculous price.
A Greggs sausage roll now costs £1.30 after two price increases in six months. It’s not there yet, but Greggs might start damaging its reputation for value with further price hikes.
Given all this, I saw better places to invest over the next few years than UK retailers.
Profits under pressure
Sadly, there’s still reason for me to be pessimistic following Greggs’ update. First-half sales were up 7% year on year to just over £1bn, but much of that was down to estate expansion (31 net new shops). Like-for-like sales in company-managed shops only rose 2.6%, down from 7.4% growth last year.
Operating profit dropped 7.1% to £70.4m, while pre-tax profit slumped 14.3% to £63.5m. Beyond costs, Greggs said it suffered from “heavy snow and strong winds in January and unusually hot weather in June“.
Looking ahead to the full year, management’s warning that operating profit could be modestly below the level achieved last year.
Peak Greggs?
These results have reignited debate about whether Greggs has reached saturation point in the UK, or whether there’s still room to meaningfully expand beyond the current 2,649 shops.
“I completely do not believe we’ve reached peak Greggs,” CEO Roisin Currie told Reuters. Supply chain investments are still being built to support capacity for 3,500 shops.
After the fall, Greggs stock’s trading at 12.6 times forward earnings, while sporting a 4% forward-looking dividend yield. At first glance, that appears like solid value, especially if Greggs’ challenges are temporary and it one day reaches 3,500 shops.
Nevertheless, I’m sticking to my guns. I continue to see more attractive opportunities elsewhere for my portfolio.
