Greggs shares are down 37% in a 12 months. Time to purchase?

I lately invested for the primary time in Greggs (LSE: GRG) after the baker’s shares fell following full-year outcomes. To this point, although, my Greggs shares have continued heading within the incorrect course.

Promoting on a price-to-earnings ratio of 12, Greggs appears to be like like a discount to me. But when that’s the case, why are they not bouncing again from the post-results hunch?

Issues might worsen earlier than they get higher

Earlier this month, I used to be impressed by a few of Greggs’ headline outcomes. Gross sales grew by 11% 12 months on 12 months, for instance, whereas pre-tax revenue was up 8%.

Not everybody shared my enthusiasm, although – and I believe they’ve a degree.

Income rising slower than gross sales is the alternative of what must occur for a corporation that has economies of scale in its enterprise. In the meantime, the headline development in gross sales outstripped a extra modest development of 6% in like-for-like gross sales at company-managed outlets.

That issues as a result of rising revenues by opening a number of new outlets can work (and Greggs is concentrating on 140-150 new outlets this 12 months, internet of closures), but it surely usually requires important capital expenditure.

The large concern, although, appeared to be the two% development in like-for-like gross sales in company-managed outlets within the first 9 weeks of this 12 months. That implies far decrease development than final 12 months, elevating questions on whether or not Greggs is operating out of steam because it tries to get extra out of its current property, for instance, by opening extra outlets for night in addition to daytime gross sales.

If like-for-like gross sales development falls additional, I reckon Greggs shares may also head down additional, even when complete revenues on the chain proceed to extend.

This nonetheless appears to be like like a discount to me!

Nonetheless, development is development. The corporate pinned its poor begin to the 12 months on dangerous climate hurting buyer demand.

Even when Greggs achieved no like-for-like development, its aggressive retailer opening programme might see revenues enhance. So too might worth inflation. Because of its well-known model and a few distinctive merchandise, the FTSE 250 baker has pricing energy.

Actually, even when like-for-like gross sales revenues have been to stay flat (which I doubt will occur), I reckon Greggs appears to be like tasty at its present worth.

Pre-tax earnings final 12 months topped £200m. The corporate has a confirmed, scalable enterprise mannequin and may profit from additional economies of scale attributable to central manufacturing crops that put together merchandise to be shipped out to its store community to be popped within the oven.

I believe there’s substantial house for Greggs to increase inside the British Isles, even earlier than it considers getting severe in regards to the potential to develop abroad.

I see dangers too. Altering excessive road utilization might imply much less passing site visitors. Wage will increase following the Funds will take a chunk out of earnings.

However as a long-term investor, though I recognise that Greggs shares might fall additional in coming months particularly if gross sales development is weak, I additionally suppose the present worth appears to be like like a possible discount. That’s the reason I purchased Greggs shares earlier this month.