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2025 has not been a good one for shareholders in high street favourite Greggs (LSE: GRG). The sausage roll supremo has had its stuffing knocked out, with Greggs shares falling 42% since the turn of the year.
Could it be that the worst is behind us and things might get better from here? As someone who has loaded up on Greggs shares over recent months, that question is one that has been on my mind!
Alarming share price performance
Although the share price has moved up slightly over the past week or so, it is still 5% lower over the past month alone.
In one sense, the price crash seen this year has been good. It has boosted the dividend yield, now standing at a tasty 4.3%.
It has also meant that the valuation looks increasingly attractive, with the shares now trading on a price-to-earnings (P/E) ratio of 11. That is markedly lower than it has been at some points over the past few years.
That comes with a big caveat, though. While the P/E ratio based on last year’s earnings looks cheap, it might not be if prospective earnings fall.
That is exactly what happened in the first half of the year. Last month’s interim results showed the baker’s diluted earnings per share falling 16%. That followed a profit warning that said full-year operating profit could be “modestly below” that of the prior year.
Bargain buy or value trap?
Even a 5% drop destroys value. £1k invested in Greggs shares just a month ago has already shrunk in value to £950.
If the slide continues – and this year’s chart so far is not a pretty one – the value destruction could continue.
That might happen. The company’s profit warning last month hardly inspired confidence. Blaming weak sales growth partly on hot weather raises a question about how adaptable Greggs’ product selection is and whether the pie and pasty seller is doing enough to accommodate the notoriously fickle British climate.
I also have some concerns about current management. A flat interim dividend did not impress me and I reckon plans to extend distribution of a frozen range to Tesco next month could backfire.
I fear it may damage what the Greggs brand stands for. I reckon some customers will be scratching their heads as to why they should buy in a Greggs shop instead of just purchasing the frozen product at Tesco and heating it up themselves.
If management does not show it can restore confidence in the City, I think its days could be numbered. That uncertainty alone could be bad for the share price. Meanwhile, if profits fall at the full-year level, seemingly cheap Greggs shares could turn out to be a value trap.
But while first-half like-for-like sales growth was disappointing, it was still growth. Thanks to new shop openings, total first-half sales grew a respectable 7% year on year.
With a strong brand, loyal customer base, and compelling value proposition for consumers, I reckon Greggs has what it takes to get its mojo back.
In that case, I think Greggs shares at today’s price may look like a bargain a year or two from now. That is why I have been buying.
