Greggs: As British as a Cornish Pasty

Greggs PLC (LSE:GRG, Financial) is an iconic U.K.-based quick-service restaurant chain that sells traditional baked goods like Cornish pasties and sausage rolls, along with sandwiches, pizza and drinks.

As the top fast-food brand in the U.K., it focuses on the food-on-the-go market. It has a vertically integrated supply chain network, with its bakeries and delivery network. Greggs operates in two segments: company-managed retail activities and business-to-business channel. Its shops are located primarily in retail and industrial parks, motorway service stations and travel hubs. As of July 2, the company operated 2,239 shops. In the first half of the year, it opened 70 new shops and closed two.

Long-term growth has been solid and the company still has a considerable runway for growth with the number of shops planned exceeding 3,000 in the medium term.

The GF Value Line indicates Greggs is significantly undervalued currently based on historical ratios, past financial performance and analysts' future earnings projections.

The GF Score is high at 89 out of 100 despite a low rating for momentum. In a YouTube video explaining the GF Score, Dr. Charlie Tian, the founder of GuruFocus, said that the growth and profitability ranks are the two more important factors in the overall score as they predict longer-term future performance. Greggs scores 9 and 8 (out of 10) for these two metrics, respectively.

On an enterprise value/Ebitda basis, Greggs is considerably cheaper than the leading fast-food companies even though it is dominant in the U.K.

Greggs' return on invested capital consistently exceeds it weighted average cost of capital, showing that the company is creating value as it grows.

The balance sheet is in terrific shape with no long-term debt.

Its financial strength is also excellent.

Greggs' dividend yield is decent currently at around 3%. While the dividend was cut during the pandemic, it now being restored.

Apart from opening new shops, Greggs is innovating in several ways to grow.

First, it is investing in growing its evening sales. Staying open later represents a significant growth opportunity as it is the largest time segment of the food-to-go market by value and is a period where Greggs has the lowest penetration during the day. It is now focused on growing sales in the evening by extending trading hours, adding menu options and offering delivery to further leverage its investment in facilities that are under-utilized after 4 p.m.

Greggs is also investing in digital channels and delivery with its partner Just Eat (JTKWY), with delivery extended from 1,000 to 1,180 shops. The majority of new delivery sales has been from increased use of the Greggs app, which rewards frequent customers for their loyalty and creates a more tailored customer experience.

The company is also innovating in menu development by introducing healthier choices, hot food and evening food. In the first half of the year, Greggs broadened its healthier choices range with two salad meal boxes. It also continued the rollout of hot food cabinets while launching two new pizzas.

Conclusion

Like most of Europe, the U.K. is likely facing a nasty recession next year as the government battles to control inflation in the aftermath of Brexit, the pandemic and the war in Ukraine. It is also about to get a new prime minister, its fifth in 12 years. Currently, inflation in the U.K. is very high (10.1% yoy in July) mostly because of the spike in the price of energy and consumer confidence has plummeted to all-time lows.

While the economic mood may be in the dumps on the British Isle, I think it has presented long-term investors with a potentially good opportunity.

With or without a recession, the British people are unlikely to lose their taste for Cornish pasties. If anything, demand for comfort food should increase when people are feeling badly.