Food retailer Greggs (LSE: GRG) has released an upbeat third quarter trading update. It shows that the company is making progress with its new strategy. It also provides guidance as to whether Greggs is a buy or a sell right now.
Greggs recorded a rise in total sales of 5.6% in the 13 weeks to October. This is a good result given the difficulties experienced in the UK economy and is in line with the company’s expectations. It shows that Greggs’ summer menu options were popular among consumers, with the company’s like-for-like (LFL) sales rising by 2.8% during the period.
Transports of delight
Clearly, the UK economy is set to endure further uncertainty in the future. Brexit could cause rising unemployment and a slowdown in the rate of economic growth, according to the Bank of England. However, Greggs seems to be positioning its business to successfully overcome such challenges. Its focus on improving the efficiency of its business through an optimised supply chain should help to boost profitability. Furthermore, it’s closing up to 80 stores this year. Alongside the opening of up to 150 shops, this could positively catalyse its bottom line.
Greggs continues to focus new store openings on transport locations. This is a sound strategy, since it provides the potential for higher margins as well as a relatively consistent sales outlook. While there is scope for further store openings, Greggs is also focused on improving its menu choices. Its coffee offering and refreshed menus could allow LFL sales to stay high after the first nine months of the year when they grew by an impressive 3.4%.
A major shift
Looking ahead, Greggs is forecast to increase its earnings by 9% next year. This puts its shares on a price-to-earnings growth (PEG) ratio of 1.9. While this is not an exceptionally high valuation, it does not offer particularly good value at a time when the outlook for the UK retail sector is highly uncertain. In other words, Greggs seems to lack a margin of safety which makes its risk/return profile somewhat unappealing.
For example, in the same sector is Tesco (LSE: TSCO). It is also enduring a period of change as it refocuses its business on the UK grocery space. This is similar to Greggs’ strategy of closing less profitable stores and replacing them with new stores in superior locations as it represents a major shift in the company’s business operations. However, unlike Greggs, Tesco trades on a PEG ratio of just 0.5 thanks to its forecast growth rate of 37% in 2017.
This doesn’t mean that Greggs’ share price will fall. However, it does mean that it offers less upside potential than Tesco and other retail sector peers. As a result, now may not be the right time to buy Greggs when its sector peers offer better value for money.