Healthy growth for Greggs this summer

Life on the high street remains tough and shop-face businesses are under pressure. Greggs is no different, but with the transformation of its stores and new, healthier products well underway, the company and its shareholders are reaping the rewards. The share price has just poked its head above a two-year trading channel.

Sales are still growing, up 5.6% in the third quarter versus 5% a year ago. A popular summer menu and value deals also underpinned like-for-like sales growth of 2.8%, down from a stunning 4.9% increase last time but in line with forecasts. For the year-to-date, sales are up 5.6%, or 3.4% like-for-like.

Clearly, Greggs' store and product turnaround programme continues to transform the traditional sausage roll and pasty chain. Management will hope its new autumn/winter menu will be as much of a hit.

Greggs, which currently has 1,743 shops, opened 103 new stores this year, with 41 of them franchised stores in train stations and other transport hubs. That should be 140-150 by year-end. It has also refurbished 145 and hopes to have given 200 a facelift by year-end.

The supply chain investment programme is also going to plan, with the new distribution centre in Enfield to come into operation in the next few weeks. At this point its Twickenham bakery will be closed.

"Given trading to date and the outlook, our expectations for the full year outturn remain unchanged," said management on Tuesday. "As we look to next year, whilst we anticipate some general industry-wide cost pressures, we expect to make further progress against our strategic plan."

After a year of stable and solid market value growth, the first seven months of 2015 launched Greggs' shares from around 720p to an all-time high of 1,369p. Profit taking amid valuation concerns - the shares traded on well over 20 times forward earnings - then caused the shares to slide by over a third, bottoming at 869p after the European Union referendum.

It looks like momentum has returned, with the share price up 3% to 1,077p Tuesday, but Clive Black, retail analyst at Shore Capital, thinks the shares are "fairly valued".

"We are not minded to adjust our FY2016 pre-tax profit estimate for Greggs of £77.4 million (EPS; 58.5p). Based upon our projections, the group's stock trades on a FY2016 PE ratio of 17.3 times, an [enterprise value]/sales ratio of 1.1x and an enterprise value/earnings before interest, tax, depreciation and amortisation (EV/EBITDA) multiple of 8.4x.

"We point out that we anticipate that Greggs will end the financial year with net cash of £33.7 million, which means that all of the group's enterprise value is equity, something to bear in mind when making comparisons with other companies."

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