Urban Growth And Digital Ordering Will Transform Quick Dining

Key Takeaways

• Rapid store expansion, supply chain upgrades, and digital growth position Greggs for significant revenue and margin outperformance relative to market expectations.
  
• Shifting consumer trends and an expanded product offering are likely to increase market share, support pricing power, and drive sustainable long-term sales growth.
  
• Structural shifts toward healthier eating, market saturation risk, rising competition, inflationary cost pressures, and digital transformation challenges threaten Greggs' long-term sales growth and profitability.

Catalysts

Operates as a food-on-the-go retailer in the United Kingdom.

• Analyst consensus anticipates strong contributions from new store openings, but with robust historic ROI on new and relocated shops nearing or exceeding 30 percent within two to three years, and accelerating penetration in under-represented regions such as Greater London, there is significant potential for Greggs to deliver top-line growth far above current projections as its market reach rapidly expands.
  
• While consensus highlights supply chain capacity expansion as supportive, the scale and automation of the Derby and Kettering facilities-together with recent production line upgrades-can enable a step change in operational leverage, potentially delivering a more pronounced uplift in group-wide margins and earnings as cost efficiencies compound with volume growth.
  
• Greggs' accelerating digital adoption, exemplified by a leap from 12 to 20 percent of transactions through its app and rapidly expanding delivery partnerships, is likely to unlock a platform effect that could drive both increased frequency per customer and overall transaction volumes, translating into substantial revenue and net margin outperformance versus expectations.
  
• The ongoing consumer shift toward affordable "food-to-go" and value-centric dining-intensified during economic uncertainty-positions Greggs to both capture incremental market share from premium rivals and sustain pricing power without undermining volume, supporting both resilient revenues and stable or rising gross margins.
  
• Greggs' expanding evening menu, rapid rollout of healthier and plant-based options, and creative, buzz-generating marketing are broadening its addressable market beyond traditional daytime and demographic boundaries, setting the stage for secular increases in average transaction value and longer-term sales growth above what is currently modeled.

Greggs Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more optimistic perspective on Greggs compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming Greggs's revenue will grow by 10.9% annually over the next 3 years.
• The bullish analysts assume that profit margins will shrink from 7.6% today to 5.5% in 3 years time.
• The bullish analysts expect earnings to reach £150.5 million (and earnings per share of £1.46) by about July 2028, down from £153.4 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 26.5x on those 2028 earnings, up from 11.3x today. This future PE is greater than the current PE for the GB Hospitality industry at 17.3x.
• Analysts expect the number of shares outstanding to decline by 0.12% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.15%, as per the Simply Wall St company report.

Greggs Future Earnings Per Share Growth

Risks

• Structural changes in consumer preferences toward healthier eating and potential increased anti-obesity regulation could reduce long-term demand for Greggs' core high-calorie bakery and fast food products, which may act as a persistent drag on like-for-like sales growth.
  
• Greggs' rapid store expansion in the UK risks approaching market saturation, as indicated by the brand's high density in core markets and statements about building capacity for up to 3,500 shops, potentially leading to diminishing returns on new locations and long-term revenue growth deceleration.
  
• Intensifying competition from both premium-oriented quick service and diversified fast food brands expanding into bakery/snacking threatens Greggs' pricing power and market share, which could suppress future revenues and limit earnings growth.
  
• Persistent input and operating cost inflation, particularly in wages and food ingredients, will continue to pressure net margins, and the company's focus on value pricing may constrain its ability to fully offset these higher costs through price increases.
  
• While Greggs has increased investment in digital channels and menu innovation, it remains reliant on a relatively narrow product range and faces the risk of lagging behind in digital transformation, which could erode its competitiveness and ultimately impact long-term growth in revenue and earnings.

Valuation

• The assumed bullish price target for Greggs is £30.4, which is the highest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Greggs's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of £30.4, and the most bearish reporting a price target of just £13.3.
• In order for you to agree with the bullish analysts, you'd need to believe that by 2028, revenues will be £2.7 billion, earnings will come to £150.5 million, and it would be trading on a PE ratio of 26.5x, assuming you use a discount rate of 9.1%.
• Given the current share price of £17.09, the bullish analyst price target of £30.4 is 43.8% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.