Pastygate serves up Greggs investment quandary

Monday, Apr 23 2012 by
Pastygate serves up Greggs investment quandary

They say that there is no such thing as bad PR and bakery group Greggs (LON:GRG) has wasted no time in trying to turn the Treasury’s plans to add 20% VAT to warm pies, pasties and sausage rolls to its own advantage. While news of the tax surprise in March inevitably dented shares in the £520 million market cap company, there are still reasons to be cheerful, and no shortage of column inches to promote its products either. 

What’s the story? 

With a 1,500 strong chain of stores around the country, Greggs is a familiar name on Britain’s High Streets. While the company has won praise for its relentless growth in conditions that have caused havoc elsewhere in retail, the last thing it needed was a new tax on its main product lines. Helpfully, a number of politicians, press and public weren’t impressed either – triggering the start of a 'Save Our Savouries' campaign backed by, among others, The Sun. Greggs chief executive Ken McMeikan may not have guessed at the start of the year that he’d be posing for photocalls with Sun models and angry customers but, hey, it’s all in a day’s work for the boss of a FTSE 250 company. 

What’s the bull case? 

March’s Budget news instantly slashed 30p from Greggs’ share price and sucked the wind from the sails of a robust set of full year figures announced a week earlier. Among the highlights there, revenues were up 5.8% to £701 million and pre-tax profits were up a touch at £53.1 million. For dividend hunters, the point of interest was a 6% increase in the full year payout to 19.3p – the 27th consecutive rise in dividends since the company floated in 1984 – which is well covered at more than 2x. 

On the financials, Greggs’ forward P/E of 12.2 is slightly higher than the industry median 9.7, revenues and net profits have grown consistently over five years and the company appears keen to keep opening new stores (84 last year, 90 this year). Return on assets increased for the fourth year to 15% and its operating margin improved from 7.9% to 8.6%. However, in some respects those profitability indicators flatter the company, because… 

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…like many retailers, Greggs pays for the majority of its shops under operating leases. For what it’s worth, the company has around £162 million in operating lease commitments spread between 0-5+ years. While not uncommon as an accounting policy (other retailers like JD Sports (LON:JD.) also lump such leases around) its always worth remembering that operating leases are essentially a form of unsecured and fairly risky debt. Analysts regularly reclassify operating leases as capital leases which then show up on the balance sheet as higher assets and liabilities. Briefly, the net impact of performing this financial ninjitsu on the ratios is to make the company appear more levered and less profitable. For a case study on how to account for operating leases, Richard Beddard at put JD Sports under the spotlight here

Meanwhile, what initially appears to be a niche in the High Street bakery and warm takeaway food sector actually pitches Greggs against competition from the likes of J Sainsbury (LON:SBRY) and Tesco (LON:TSCO) among others. Larger grocery chains have been acting in increasing numbers to open smaller High Street stores and their in-store bakery/retail offering certainly encroaches on Greggs’ competitive positioning. In its results, the company said that sales had dipped by 1.8% in the first 10 weeks of the new year and hinted that bad weather could have been the main cause. Analysts were less certain that is wasn’t starting to feel the effects of a highly competitive market for coffee and snacks on the High Street. 

What kind of investors might look at Greggs? 

There are plenty of reasons to think that shares in Greggs will continue to be supported by the financial community because it covers many of the bases. While the pasty tax has hit the shares recently, over multiple timeframes the stock has performed well. The sustained momentum in the company’s share price qualifies Greggs for a place on our Value Momentum screen, which aims to track down attractively prices stocks that are on the move. Meanwhile, that stellar dividend record makes Greggs one of just 45 London listed stocks to appear on our Best Dividends screen, which is currently flying with a return of 11.37% over the past three months versus a more modest 0.74% for the FTSE 100. 

Until recently, Greggs was also qualifying for our take on Robbie Burns’ Naked Trader strategy, but its declining EPS growth last year means it just misses. Nevertheless, the fact that the stock comes close to qualifying for a demanding ‘growth at a reasonable price’ screen is indicative of its apparently robust fundamentals and positioning as a value stock that could be worth further investigation by investors that like the value / momentum / dividend story.


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Greggs plc is a United Kingdom-based bakery food on-the-go retailer. The Company owns 1,671 shops, nine regional bakeries and two distribution centers. The Company’s product offerings include pasties and bakes, sandwiches, breakfast, sweets, and drinks and snacks. The Group also provides frozen bakery products to its wholesale customers. more »

Share Price (Full)
-21.0  -2.0%
P/E (fwd)
Yield (fwd)
Mkt Cap (£m)

JD Sports Fashion Plc is a United Kingdom-based retail company. The Company is engaged in the retail and distribution of branded sportswear, fashionwear and outdoor clothing and equipment. The Company operates in three segments; sport retail, which includes results of sport retail trading companies JD Sports Fashion Plc, John David Sports Fashion (Ireland) Limited, Chausport SA and Duffer of St George Limited; fashion retail, which includes results of fashion retail trading companies Bank Fashion Limited and RD Scott Limited; Outdoor retail, which includes the results of the outdoor retail trading company Blacks Outdoor Retail Limited, and distribution businesses, which includes results of distribution companies Topgrade Sportswear Limited, Nicholas Deakins Limited, Canterbury Limited (including global subsidiary companies), Kooga Rugby Limited and Nanny State Limited. The Company also operates on-line businesses for these retail fascias. more »

Share Price (Full)
2.2  0.5%
P/E (fwd)
Yield (fwd)
Mkt Cap (£m)

J Sainsbury plc is a United Kingdom-based company, engaged in supermarkets and convenience stores, and an online grocery and general merchandise operation. The Company also has two property joint ventures with Land Securities Group Plc and The British Land Company Plc. Sainsbury’s Bank provides a range of banking and insurance products. As of March 2013, J Sainsbury plc consists of a chain of 592 supermarkets and 611 convenience stores. It provides a selection of movies, music, books, games and other entertainment products through Sainsbury's Entertainment. more »

Share Price (Full)
-2.6  -1.0%
P/E (fwd)
Yield (fwd)
Mkt Cap (£m)

  Is Greggs fundamentally strong or weak? Find out More »

1 Comment on this Article show/hide all

Isaac 23rd Apr '12 1 of 1

Ben Hobson - Just wanted to say thanks for your articles, I think your a credit to the Stockopedia team and it is a joy to read your articles, please keep up the good work.

thank you

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