Greggs share price: what to expect from 2018 results

When is Greggs’s earnings date?

Greggs will release its 2018 annual results on Thursday 7 March at 7:00 GMT.

Greggs results preview: What does the City expect?

Greggs is now in the fifth year of its investment programme that is seeing the baker take more control over its supply chain and update its internal systems and processes. The plan has required 'an exceptional level of capital investment and business change' but has won support as Greggs has continued to deliver enough growth to justify the high levels of spending, even if it has wavered at points along the way.

Greggs will continue to invest heavily until the end of 2020 and has said budgets will begin to normalise once again from 2021 onwards, when it hopes its investments will have put it in a stronger position to open hundreds of new stores, underpinned by better infrastructure.

The company will be keen to demonstrate its investment, new product launches, and store restructuring is continuing to help the baker – trying to champion the ‘food-to-go’ market – buck the deteriorating state of the UK’s retail sector and high streets. Greggs shares took a hit in the middle of last year when bad weather hit sales enough to put its 2018 annual profit target into doubt, but it subsequently went on to raise expectations in November and January.

Read more on Greggs share price taking battering as sales slowdown in mid-2018

Greggs has already told investors what to expect when it releases its 2018 annual results. The company said sales rose 7.4%, slightly faster than the year before and enough to push the total figure over the £1 billion mark for the first time. However, it has revealed like-for-like growth of its managed stores (excluding its franchised ones) slowed to 2.9% in 2018 from 3.7% the year before. Still, Greggs said it will deliver underlying pretax profit (which excludes exceptional items) of 'at least' £88 million, with a company-compiled consensus forecasting £88.7 million, representing an 8.6% jump compared to the 1.9% rise reported in 2017:

Greggs 2018 annual result expectations

What to watch out for in Greggs’ 2018 results

1. Guidance for 2019
2. Supply chain investment
3. Capex
4. New products
5. Store openings
6. Dividend

Guidance for 2019

With Greggs having outlined what to expect when it releases its annual results attention is already on the outlook. Investors will be keen to see if Greggs has maintained the momentum after reporting an 'exceptionally strong start' in the first seven weeks of 2019 – enough so it has already raised its profit expectations for the year.

Greggs said sales growth accelerated in the first seven weeks of 2019, up 14.1% year-on-year (YoY), while like-for-like growth from managed stores was up 9.6%. Although it warned growth 'eased slightly' in February it said the stellar start to the year meant the 'strength of trading is likely to have a material impact on the first half results for 2019'. That is, however, in part down to the weak comparative figures for the first half of 2018, when weather hit sales (sales growth in the first seven weeks of 2018 was 6.2% while managed like-for-like growth was just 2.9%). Greggs has said the comparatives will normalise in the second half of this year.

Investors can expect an update on the baker’s expectations for 2019 when it releases its annual results, including its profit guidance.

Supply chain investment

The current programme is seeing Greggs invest £100 million to reshape its supply chain so it can open more stores and a further £25 million in overhauling its internal processes, such as its payroll systems. This has already seen the baker move operations from Edinburgh to Glasgow and establish centres of excellence for specific products (its Glasgow factory specialises in Yum Yums, for example). Greggs has said taking ownership of its own supply chain and weaning itself off third-party manufacturers means 'we can remain focused on the customer, delivering what our shops and customers need on time and in full'.

In 2018, Greggs took steps such as relocating its pizza production, building a new operation creating doughnuts and improving its distribution so products can be transferred from one branch to another more effectively. In 2019, Greggs plans to open a new distribution centre in Amesbury, Wiltshire.

The year 2018 looks certain to be the fifth straight year of positive like-for-like sales growth and record underlying profits, which Greggs has said is a testament to its strategy and investment. Investors will be keen to hear plans are advancing on schedule and on budget.

Capex

The investment in the supply chain and internal systems is being phased. When it released its interim results for 2018, the baker said it expected total capital expenditure in 2018 to amount to £85 million to £90 million, up from the £70.4 million spent in 2017. Greggs spent just over £33 million in the first half of last year, predominantly on overhauling its manufacturing operations and expanding its logistical capacity.

The company has said its overall investment plans remain unchanged but has said its budgets could change slightly this year or next if certain phases shift between years.

New products

The product receiving all the praise for the strong start to 2019 is the vegan sausage roll launched at the start of the year. After spending between 12 to 18 months developing the product, made of meat substitution product Quorn, Greggs released the vegan roll in about half of its stores to cash in on 'Veganuary' diet but is now in the process of rolling it out to all its stores by early March.

The new product has been regarded as a huge success from a marketing perspective after sparking debate on programmes such as Good Morning Britain, and Greggs has since maximised the opportunity by bundling it with a vegan vegetable soup to create a new £2.25 meal deal. Neil Knowles, the digital brand manager of Greggs, was reported to be aiming for Greggs to 'punch above our weight' when it comes to marketing, focusing on smart campaigns 'rather than outspending'. Although the vegan sausage roll has been a success, its campaigns have not always paid off: its recreation of a manger containing a sausage roll in 2017 was heavily criticised.

Greggs has already said it plans to develop new products to meet changing consumer tastes. Last year, it focused on new ‘growth categories’ in hot drinks, breakfast, healthier choices and hot food – which accounted for 30% of total sales in the first half of 2018 compared to just 15% the year before. Investors will be keen to see that number move higher when the full year results are released, particularly as the second half was stronger than the first.

Store openings

Greggs has been restructuring its store portfolio by opening new branches and closing others but has ensured its overall network has grown each year. Greggs opened 149 new stores in 2018 and closed 50, meaning it delivered its guidance to open around 100 net new stores during the year. The baker has said it expects to open between 90 to 100 net new stores in 2019.

The opening and closing of stores is significant as it shows Greggs is responding to the changing environment, such as the slow death of the traditional high street. This has prompted Greggs to try new concepts: it has opened at least two drive-thru stores, launched its first underground store in Westminster tube station and added a number of new travel destinations, such as Birmingham New Street station, Glasgow Buchanan bus terminal and East Midlands Airport. This model has been adopted by other retailers keen to defy the ailing retail sector: Whitbread-owned Costa Coffee has introduced drive-thru stores while WHSmith has been gradually moving its focus to transport locations over the high street for years. Greggs has said only 20% of its stores were based outside 'traditional shopping locations' in 2013 but now that figure stands at 35%, with a view of hitting 50% over the longer term.

Read about what is in store for Whitbread without Costa Coffee

Greggs had just over 1,950 stores trading at the end of 2018 and its investment in the supply chain is designed to put the baker in a position to expand its network to 2,500 stores.

Dividend

Greggs will stick to its progressive dividend policy in 2018. The interim payout for 2018 was raised 3.9% to 10.7p, and the annual dividend should exceed the 32.3p paid in 2017 (up 4.2% from 2016). The baker’s policy is to pay a dividend that is twice covered by earnings, with any further surplus cash being returned to shareholders.

Greggs share price: technical analysis

Greggs enjoyed a better Veganuary than most, with the firm surging 20% in the first month of 2019. That bullish sentiment has continued apace, with February on track to close out the month with another 15% added to the company’s value. The daily chart highlights an impressive uptrend in place, with retracements being kept to a minimum. With the recent consolidation showing clear respect to an ascending inside trendline of support, there is a good chance that we will soon turn higher for yet another leg higher.

The key to this trend continuing is that ability to maintain higher lows, and thus a bullish outlook remains in play unless we see a fall below the £15.39 swing low respected earlier this month. For the near term, we would need a fall below £17.26 to bring about a more bearish short-term retracement into play, negating the notion that we are in for a shallow retracement.

How to trade Greggs’ annual results

A Thomson Reuters poll of eight analysts show there is an almost unanimous long-term ‘hold’ recommendation (as of 27 February), with just one broker breaking ranks and recommending a ‘strong buy’.

The overall stance on Greggs has become more bearish over the last three months, with several brokers having downgraded the company.

Greggs shares: broker recommendations

Greggs earnings: will the baker be on a roll?

Retailers are trying to distance themselves from the tough environment and demonstrate they have the right strategy to address the changes sweeping the high streets and shopping malls. Greggs is no different and, despite having heavily invested in challenging times, the baker has proven its efforts are working by continuing to deliver record sales and profits – something investors will be keen to continue in 2019.

Greggs has told investors it believes it will deliver a stronger performance in the first half (H1) of 2019 than it first expected but, with Brexit around the corner and little relief emerging for retailers, there is every chance the outlook could sour. Fortunately, Greggs has moved early to make the key investments that, for now, are paying off and the phased approach to investment should help the firm keep a lid on spending in the event of any downturn.

Greggs has managed to invest while growing sales, profits and dividends. If it can keep delivering that then things can only improve when investment begins to tail off in 2021 and its ability to expand improves. If growth starts to suffer then questions could start to be raised about the baker’s investment and its ambitious expansion plans.

The long-term broker rating is a clear 'hold', with only one broker breaking ranks.