Greggs (LSE: GRG) has not had the easiest start to the year. Shares have slid nearly 40% leaving investors wondering if the love affair with the high street bakery is over.
The headlines have been grim. Like-for-like sales edged up just 2.6% in the first half while total sales topped £1 billion. That sounds decent, but investors reacted poorly to Greggs’ warning that full-year operating profits would fall slightly short of last year’s figures.
June’s scorching weather has been blamed for putting people off buying hot pasties and sausage rolls. July so far has been another scorcher and that is unlikely to help footfall in Greggs’ core locations. When the thermometer spikes, city centres empty out and Greggs’ core offer struggles to tempt customers. Add in the cost of refurbishing stores and extending opening hours and it is no surprise profits are under pressure.
But before investors rush for the exit, let’s remember Greggs is trading on a forward price-to-earnings ratio of roughly 12. That is cheap for a company with a strong brand and loyal customers. The dividend yield nudges 4 per cent which is an attractive income stream for a defensive stock. Plus, profit still comfortably covers dividends.
Yes, net debt is expected to rise slightly, which is a risk if growth stalls or interest rates stay high. And yes, Greggs has been opening stores aggressively, but the UK market might be reaching a limit on how many more shops it needs. These are real concerns.
However, Greggs is not a one trick pony. The brand has resilience and a habit of bouncing back. The hot weather will end, footfall will return, and cost-cutting plans might finally show results. The question is whether the market is being too harsh in punishing the shares.
The next set of interim results will be a key moment. If there is a hint that profits might fall further or costs are rising faster than expected, shares could fall more. But if Greggs can deliver a solid outlook, the recent share price weakness could look like a buying opportunity.
Greggs is not a slam dunk. The road ahead looks a little bumpy and the share price could slip further. Yet the valuation and dividend make it worth holding rather than selling in panic. For investors who believe in the brand and the long-term story, this might be the time to keep the faith.
Disclaimer: This communication is intended for information purposes only and should not be considered investment advice. The value of your investment may rise or fall and your capital is at risk. Please do your own research or consult a regulated financial adviser before making any investment decisions.