Upcoming Shop Openings And Tech Investments Will Extend Reach But May Pressure Margins

Key Takeaways

• Strategic expansion, supply chain investment, and menu innovation are set to boost revenue, profit margins, and operational capacity.
  
• Technological upgrades and marketing efforts enhance efficiency, customer engagement, and brand strength, driving sustained growth.
  
• Expansion investments and rising costs pose risks to cash flow and net margins, with execution challenges and macroeconomic factors affecting revenue and customer retention.

Catalysts

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

• Greggs is expanding its retail footprint significantly, with plans to open over 200 new shops in 2025, aiming for a total of more than 3,000 shops, and potentially up to 3,500. This expansion strategy in underrepresented areas is expected to drive substantial revenue growth.
  
• The company is investing in new supply chain sites at Derby and Kettering, set to come online by 2026 and 2027 respectively. These developments will increase production and distribution capacity, supporting the anticipated growth in shop numbers and therefore boosting revenues and profit margins.
  
• Greggs' investment in technology, particularly in its ERP systems and digital platforms like the Greggs app, is improving operational efficiencies and customer engagement. This technological advancement is expected to enhance net margins by reducing costs and increasing customer transaction frequency.
  
• The focus on menu innovation and extending trading hours, especially the growth of evening trade and popular new products, will likely contribute to higher sales volumes and improved profitability, affecting both revenue and net margins positively.
  
• A strong emphasis on marketing strategies and brand positioning, such as their #1 ranking for food to go brand consideration, is expected to maintain or improve customer perception and purchase intent, leading to sustained revenue growth.

Greggs Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Greggs's revenue will grow by 8.3% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 7.6% today to 5.7% in 3 years time.
• Analysts expect earnings to reach £147.1 million (and earnings per share of £1.45) by about April 2028, down from £153.4 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as £127.8 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 20.6x on those 2028 earnings, up from 12.0x today. This future PE is greater than the current PE for the GB Hospitality industry at 17.8x.
• Analysts expect the number of shares outstanding to grow by 0.33% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.67%, as per the Simply Wall St company report.

Greggs Future Earnings Per Share Growth

Risks

• The investment in new sites and supply chain infrastructure, particularly Derby and Kettering, introduces significant capital expenditure, which may not yield expected returns and could create pressure on cash flow and net margins during the investment phase.
  
• Rising wage costs, including the national living wage increase and higher national insurance rates, are expected to drive substantial inflation in people costs, potentially leading to a squeeze on net margins if the company is unable to fully offset these through pricing.
  
• The company's reliance on expanding into underrepresented geographical areas carries execution risks, including potential misjudgment of local demand, which could impact revenue growth if newly opened stores do not perform as expected.
  
• The increase in administrative expenses due to investment in technology, particularly SAP ERP reinvestment, could burden the company's cost structure and impact overall net margins if these investments do not translate into operational efficiencies.
  
• Macroeconomic conditions, such as low consumer confidence and inflation in the broader food and packaging sector, pose a risk to the company's ability to maintain attractive price points, potentially affecting revenue and customer loyalty.

Valuation

• The analysts have a consensus price target of £23.157 for Greggs based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of £32.5, and the most bearish reporting a price target of just £13.3.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be £2.6 billion, earnings will come to £147.1 million, and it would be trading on a PE ratio of 20.6x, assuming you use a discount rate of 8.7%.
• Given the current share price of £18.15, the analyst price target of £23.16 is 21.6% 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.