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… 

What to watch? 

…like many retailers, Greggs pays for the majority of its shops under…

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Greggs plc is a United Kingdom-based bakery food on-the-go retailer. The Company's products and services consist of a range of fresh bakery goods, sandwiches and drinks in its shop. The Company also provides frozen bakery products to its wholesale customers. The Company owns approximately 1,698 shops, 12 regional bakeries, one distribution center and one manufacturing center. The Company has approximately 105 franchised shops operating in travel and other convenience locations. The Company offers pastries and bakes, sandwiches, breakfast, sweets, pastas, salads and soups, bread, platters, drinks and snacks. The Company's Balanced Choice products offer choices, which have approximately 400 calories. The Company's sales are made to the general public, as well as to certain organizations. more »

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JD Sports Fashion Plc is a multichannel retailer of sports fashion and outdoor brands. The Company's segments are Sports Fashion and Outdoor. The Company's sports fashion brands include JD, Size?, Chausport, Sprinter,, Kooga, Kukri Sports, Source Lab, Scotts, Tessuti, Cloggs, JD Gyms and Nicholas Deakins. Its outdoor brands include Blacks, Millets, Tiso and Ultimate Outdoors. Chausport operates throughout France retailing international footwear brands, such as Nike, adidas and Le Coq Sportif together with brands specific to the local market, such as Redskins. Sprinter is a sports retailer in Spain selling footwear, apparel, accessories and equipment for a range of sports, as well as lifestyle casual wear and childrenswear. Kooga designs and sources rugby apparel and equipment. Cloggs is an online retailer of branded footwear. Blacks is a retailer of specialist outdoor apparel, footwear and equipment. It has over 900 stores across a range of retail fascias. more »

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J Sainsbury plc is engaged in grocery-related retailing and retail banking. The Company's segments include Retailing; Financial services, and Property investments. The Retailing segment is engaged in the operation of supermarkets and convenience. The Financial services segment includes the operations of Sainsbury's Bank plc (Sainsbury's Bank). The Property investments segment includes the Company's joint ventures with the British Land Company PLC and Land Securities Group PLC. The Company has approximately 2,000 food suppliers and over 1,000 non-food suppliers. The Company offers over 15,000 own-brand products and has approximately 770 convenience stores. The Company offers groceries under various categories, such as fruit and veg, meat and fish, dairy, chilled, bakery, frozen, food cupboard, drinks, health and beauty, baby, household, pet and home. Sainsbury's Bank provides a range of products, including insurances, credit cards, savings and loans. more »

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  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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About Ben Hobson

Ben Hobson

Strategies Editor at Stockopedia. My goal is to help private investors learn and invest with confidence through the articles, ebooks and other resources we publish on site. I also occasionally bunk off to interview famous investors at expensive restaurants. I studied History at Aberystwyth University, trained as a journalist and covered business news and corporate finance before settling in as one of the first staff members at Stockopedia.  Away from Stockopedia I'm a mountain bike junkie. more »


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