US Edition Greggs
466.3p +0.4p
Questor says Buy
So, since Greggs launched its breakfast meal deal last February – a coffee or tea combined with bacon or sausage in a roll – it has sold more than 10m breakfast rolls.
Ironically, the success of Greggs' breakfast offering means it is expanding into more upmarket products such as porridge, croissants, pain au chocolat and fruit smoothies. At one time, customers passing Greggs on their walk to work would have seen staff preparing the lunch menu, but now they can pick up their breakfast.
The breakfast menu is one of the initiatives driven by Ken McMeikan, chief executive, that helped Greggs post record profits on Wednesday. Sales rose 2.1pc, or 0.2pc on a like-for-like basis, to £662m and pre-tax profits rose 8pc to £52.5m. The dividend per share was increased 9.6pc to 18.2p, the 26th consecutive year it has been raised.
Trading conditions on the high street are tough and Greggs also has to fight against rising raw material costs. However, for three main reasons, Questor believes it is a company worth backing.
Firstly, Greggs is investing through the challenging market. Capital expenditure was £30.3m in 2009, £45.6m last year and should be £60m in 2010.
The business is continuing to expand into areas other than the traditional high street such as industrial estates, transport hubs, and even football grounds. With consumer spending struggling, Greggs is making itself accessible to workers and in busy environments.
Greggs opened 68 net new outlets last year, bringing its total number of stores to 1,480. It plans to open another 80 this year. Overall, the group aims to open 600 new shops in the next few years and will take advantage of the troubled high street to take on vacant units at the right price.
Secondly, Greggs' reputation for "value" is vital amid economic uncertainty. Following the success of the breakfast roll, Mr McMeikan is exploring other deals Greggs can offer, such as "half baguettes", which go on sale this week for £1.40.
The final factor Questor is attracted to is that, by producing much of what its sells, Greggs has a greater control over rising food prices. Maintaining its prices while also protecting margins will be vital for the company given its positioning as a "value" brand. In response to the challenge, Mr McMeikan has assembled 14 of his "best people" to consider technology, scheduling and planning methods that can reduce the amount of fresh food the bakery chain throws away at the end of a day.
Greggs was first tipped by this column in August 2009 at 400p and the shares are now 17pc higher, compared with the FTSE 100's 20pc rise over the same period. On 2011 forecasts Greggs is trading at 11.8 times earnings, moving to 10.4 for 2012, and a yield of 4pc. The forecasts are not that challenging, Greggs is predicting only "marginally positive" like-for-like growth for 2011 – the same as last year. So far in 2011, like-for-like sales are up 0.4pc.
Shares in the bakery chain could be the offering the same value as its breakfast rolls. Buy.