Greggs plc — Not peak Greggs yet

The Next Generation Greggs programme is expected to accelerate Greggs’ long-held strategic objective of becoming the customers’ favourite for food-on-the-go (FOTG). The programme has four drivers of growth, supported by higher investment in the supply chain and systems: (1) accelerating the rate of estate growth and improving the estate’s quality; (2) new digital channels (delivery and click and collect (C&C)) to enable Greggs to extend reach and customer choice; (3) grow sales in the evening with the help of menu enhancements and leveraging all distribution channels; and (4) making the Greggs brand more relevant to more people with higher customer engagement and the Greggs Rewards loyalty scheme.

The goal of the programme is an ‘ambitious’ doubling of sales to £2.4bn by FY26, a CAGR of 15%, with higher rates of growth expected in the earlier years, per our estimates, given the phasing of the different initiatives. There is no explicit guidance for profitability, given the competitive market and vagaries of input cost inflation, but management hopes to at least sustain margin in the long term as potential operating leverage and supply chain optimisation fund the increased investment in new sustainability initiatives. A better-than-expected trading recovery following COVID-19 related closures and operating restrictions fed a number of upgrades to management’s guidance through FY21, the earlier than expected re-instatement of the ordinary dividend at H121 and a special dividend (40p/share) to be paid in H122. Increasing input cost inflation is likely to restrain FY22e profit growth, with management expecting no material increase in PBT in FY22. The company operates a conservative balance sheet which supports the progressive dividend policy. We forecast net cash pre-IFRS 16 liabilities through FY23 despite increased investment to support the targeted growth, providing potential for further special dividends.

Management’s focus on driving growth in the FOTG market has led to a long-term increase in Greggs’ valuation multiples as sales growth accelerated and cost leverage produced a consistent increase in profitability. The recent share price weakness has led to near-term multiples (P/E for FY22e of 19.7x and FY23e of 19.0x) similar to more recent, non-COVID-19 affected, average multiples (FY19: 21.8x) but below recent peak multiples (FY19: 27.6x) despite higher expected revenue growth. Our DCF-based valuation, which includes the assumption management achieves £2.4bn revenue by FY26, suggests a share price of £31.60.

We see the main sensitivities as:

Greggs was founded as a Tyneside bakery in 1939 and grew to become a national chain with c 1,670 stores by the end of 2012. From 2013, when Roger Whiteside became CEO, the present C-suite team set a strategic vision of becoming customers’ favourite for FOTG, with a value-based offer.

The four pillars to the long-term strategic vision have been consistent since then:

Prior to the COVID-19 pandemic, from FY13–19 management’s strategy generated strong financial growth with CAGRs for number of stores of 3%, revenue of 7%, gross profit of 9%, and operating profit of 19%.

The long-term strategic vision remains the same, but in January 2020 management launched the Next Generation Greggs programme, with the aim of increasing customer loyalty and choice, and widening distribution of Greggs’ products across multiple channels and more dayparts. Following the initial disruption caused by the COVID-19 pandemic in Q120, management decided to accelerate the programme as the pandemic had accelerated the expected change in customer behaviour. At the October 2021 capital markets day (CMD), management quantified how it expects Next Generation would drive growth, setting an ‘ambitious’ five-year (to FY26) target to double revenue to c £2.4bn, with four key growth drivers:

All of the above will be enabled by higher investment in the supply chain and systems to support the expected growth and new services, and are underpinned by the Greggs Pledge (ongoing improvement in its ESG credentials and continuing to act responsibly).

Leaving aside the post COVID-19 recovery to prior trading levels, we consider in the sections below the key drivers to revenue growth. We believe the majority of the indicated COVID-19 recovery and wholesale revenue growth of £180m is the COVID-19 recovery element, which will occur over the next two to three years, and the balance, wholesale, over the five years.

While management provided a revenue target for FY26, there was no guidance for expected profitability. It is hopeful of maintaining current levels of profitability from natural cost leverage leading to underlying margin expansion (subject to the unpredictable nature of input cost inflation), which has to support an indicated 0.5–1.0 margin point pa for incremental investment in sustainability.

Beyond its UK aspirations, management has highlighted the potential to seek growth internationally via another brand, potentially after 2024, the peak year of investment.

Management estimates estate growth (ie space growth and like-for-like (l-f-l) growth from company-managed and franchise stores) will contribute half, £600m, of the expected revenue growth through FY26.

Greggs has typically opened 90–100 net new stores pa. The new plan includes accelerating this to 150 net new stores pa. The opportunity to scale more quickly is due to a number of contributing factors:

Within the target of 150 net new stores pa, 100 will be company-managed stores and 50 will be franchises, and there will be 50 relocations pa of company-managed stores. The acceleration in net store growth is due to greater expected growth from company-managed stores, which have historically ranged from net 12 store closures to 57 net openings pa between FY15 and FY19 (we exclude FY20 due to the outbreak of the COVID-19 pandemic). The number of expected net franchise openings is consistent with more recent years (40–60 pa from FY15–19). By FY26, franchises should reach c 21% of the store portfolio from the current c 17%. Greggs does not disclose details of area traded in its stores, but we believe the average store size is likely to increase, which will, in part, be required to support the growth from newer channels (see below), as well as the provision of seating in more stores.

In addition to the acceleration in net store growth, management guides to the number of refurbishments/refits to accelerate, at 250–300 locations pa, an increase from 57–202 pa from FY15–19.

The higher rate of store expansion leads to the obvious question of whether management is over-extending, as happened in the wider restaurant space pre-COVID-19. Here, management points to the belief shop density is currently lower than it can be, the greatest opportunities are outside traditional towns and suburban locations where it is well represented already, and even in the ‘top postcode’ Greggs continues to open new shops. With respect to shop density, management’s assumption of one store to 20 thousand people to reach the target of at least 3,000 stores compares with the current density of one to 30 thousand people, and versus the current top postcode of one to 15 thousand.

With respect to new types of locations, Exhibit 3 highlights the current number of Greggs’ stores by location type versus the total number of available locations.

The actual addressable market is much lower than might be interpreted from a straight comparison of the number of total locations, given, for example, that smaller retail parks are not able to support a Greggs store, and Greggs only partners with the larger petrol retailers. Nonetheless, the figures suggest good potential for estate growth, with limited expected cannibalisation from the existing estate, which is supported by the company’s experience. The areas of focus will also continue Greggs’ gradual increase in the number of stores accessible by car (70% in H121) and towards non-city locations.

The aspiration to grow sales from more channels, ie delivery and C&C to complement traditional walk-in, and sales in more dayparts, ie the underpenetrated evening versus traditional day time, should drive sales densities for the stores and improve store-level contribution given relatively limited marginal operating costs.

In aggregate management targets incremental sales through FY26 of £280m (c 23% of the total growth target) from a combination of growing evening walk-in sales (£110m), evening delivery (£70m), and daytime delivery (£100m). Although management has been specific about the expected breakdown between the three revenue streams, in reality there is some uncertainty about the breakdown of the expected incremental evening revenue (£180m) by channel, and delivery revenue (£170m) by daypart. The estimated incremental evening revenue assumes Greggs can achieve two thirds of its lunchtime market penetration in the shops that extend their opening hours, and c 40% will be via delivery from the current 20%. With a more established infrastructure in place and established track record, delivery is likely to produce more growth in the near-term than evening trading, which requires greater development of the menu and improved CRM.

Following successful trials that began before the pandemic with Deliveroo, Uber Eats and JustEat, the decision was taken to roll-out the delivery service via an exclusive partnership with Just Eat. In July 2020 the plan was extended with a view to providing nationwide coverage of major cities from 600 stores by the end of FY20. The move reflected the increasing importance of delivery to how consumers consume food with increased convenience provided by the expansion of companies such as Just Eat. Management believes the motive for using delivery has evolved/is evolving from one that was mainly based on a lack of desire to cook to it being considered an affordable and regular treat, and therefore a more attractive growth prospect.

Given the initial disruption caused by the COVID pandemic which affected Greggs’ ability to trade from its physical estate, delivery has provided a much-welcome support to revenue during periods of operating restrictions and lockdowns. The increasing consumer acceptance of delivery is proven by management’s comments that delivery has continued to perform well as COVID-related restrictions ended.

By the end of FY21, delivery was available from 1,000 stores, as expected, with the guidance of reaching 1,300 shops by the end of 2022. Through 9M21, Greggs’ trading updates highlighted delivery represented a relatively consistent c 8-10% of company-managed store sales, equivalent to c £42m of revenue in H121 or an average of c £50k per store (837 offering delivery at end H121), from 5.5% in Q420. The contribution from delivery to FY21 sales has not been quantified as management considers the relevant ongoing disclosure. If we simplistically annualise H121 delivery sales (to £84m) and add management’s targeted incremental delivery revenue (£170m), by FY26 delivery revenue would be c £254m in FY26 or c 11% of group revenue, a greater proportion than at present. Sales through the delivery channel have a higher average transaction value of £9-10 than walk in of £3-4 given the order is typically for more than one person. The gross margin for delivery is lower than average given the aggregator’s platform fee, but Greggs benefits further down the income statement from leveraging the fixed store operating costs.

As the time of the CMD, management indicated 95% of Greggs’ delivery revenue was generated before 4pm, which compares to their estimates that almost half of the delivery market revenue is earned after 5pm, which means the evening market is largely untapped, and therefore represents a significant opportunity, subject to changes in the menu offer etc.

Greggs’ C&C service, available on the website and app, allows customers to order in advance and choose where and when to collect the order from a dedicated in-store collection point. It was also rolled out to all company-managed stores from September 2020. The consumer benefits from an easier/better shopping experience, ie more time to browse the menu and collection from a dedicated collection point reducing the need to queue, to have a greater guarantee of availability of food, as well as providing more opportunity to personalise the order given the greater time between order and collection.

The post 4pm dinner market, at an estimated c 38% (source: Greggs CMD 2021 presentation) of the total FOTG market (which simplistically excludes supermarket food bought and prepared at home, and full-service restaurant/pub food) makes it the largest daypart. Due to Greggs’ historical product offer and focus on primarily the lunch and, more latterly, breakfast markets, its share of the FOTG dinner market was estimated by management to be c 1%, well below its share of the breakfast market of 9.9%, lunch 6.8% and snacks 5.1%. The 4–9pm FOTG market was estimated to be worth £9.1bn in 2019, with a high degree of fragmentation beyond the market leaders, McDonalds (c 19% share), Domino’s (c 9%), KFC (c 7%) and Pizza Hut (c 5%).

In aggregate, management estimates its total FOTG market share in 2019 at c 5%. Irrespective of the move into evening trading, management is optimistic of future share gains as it looks to invest in customer loyalty, choice and developing new channels.

Greggs began experimenting with extending its trading hours to the evening in the autumn of 2019, following some initial development of the menu to offer items more suited to the evening, for example pizzas, and investment in hot food cabinets. The initial trials, before Greggs had a delivery channel, indicated, as might be expected, that evening trading may not be appropriate for all locations but was successful in high footfall locations such as city centres and travel hubs. With delivery in place management believes more locations become viable in the evening, not just those with high footfall. To drive revenue growth in the evening, there will be further enhancements to the menu (eg more sides, chicken options, milkshakes), also helped by increased product customisation, and evening trading will be extended to c 500 stores by the end of FY22, from the current c 108 stores.

Improving customer loyalty is seen as a key opportunity in making further market share gains, with a ‘difficult to gauge’ estimate that improved CRM has the potential to generate £140m revenue by FY26, equivalent to about c 12% of the incremental revenue growth over the period. The growth is expected from a combination of increasing frequency of purchase and spend per visit and is likely to be non-linear.

The aspiration is to grow the number of enrolled customers to the Greggs Rewards loyalty scheme (initially launched in FY14) from c 400k customers to ‘millions’ following a recent upgrade to the Greggs app, and then improved CRM will prompt customers to visit more frequently and increase spend per visit.

Unlike many of its competitors, Greggs does not invest in above-the-line advertising, given the view that direct sight (ie in-store advertising and promotion), word of mouth and social media channels are more cost effective and efficient. Management’s broader store and product strategy have led to a consistent improvement in the Greggs brand in recent years.

Greggs has purposefully extended and improved the quality of its product range to tailor it to the demands of the FOTG customer and market, offering a more varied menu across the differing dayparts, while retaining its strong heritage in bakery, which has been successful in driving sales growth. The product offer is differentiated from many competitors by the way it is freshly prepared in the shop with the aim of delivering an ‘Always Fresh, Always Tasty.’ experience. The aim of new product launches is to provide customers with new reasons to visit Greggs. With respect to pricing, outstanding value for money is a key attribute of the offer, meaning Greggs will not aim to match the lowest prices across all competing products but will aim to be highly competitive against rivals.

Key developments in the evolution of the past and future product offer have included:

Following his appointment as chief executive in February 2013, Roger Whiteside set out the new strategy in August 2013, to transition Greggs from a traditional bakery retailer, which was migrating to the food retailers, to focus on the growing FOTG market, recognising the majority of customer visits were on the go. At this stage the ambition was to increase shop numbers to over 2,000 in the long term. This required improving the quality of the existing estate over two to three years, increasing the capacity of the supply network, and a five-year £25m investment in processes and systems to centralise operations where possible. From a store perspective, this meant a transition of the store portfolio from the previous ‘Local bakery’ and ‘FOTG’ formats via relocation and refurbishment to a ‘Bakery food-on-the-go’ format, combining the best aspects of both formats. As part of the transformation, the in-store bakeries were consolidated to a regional bakery network.

With the FY15 results, Greggs announced a substantial £100m five-year investment programme to upgrade its national manufacturing and distribution infrastructure, moving from a traditional decentralised bakery model to a centralised ‘food to go’ model. The objective was to have enough capacity to support ‘substantially beyond 2,000’ outlets from ‘national centres of excellence’ in specified products, and the addition of new distribution centres. In 2016, from 12 regional bakeries, three subscale sites were closed with capacity transferred to the recently acquired Enfield site and the existing Glasgow site. Ultimately the plan led to consolidation of manufacturing activities, that is, production of key products was centralised to one or two sites each, from all products being produced in each bakery. As the programme progressed, it has changed as opportunities were identified to increase efficiencies in the network, for example building an automated frozen distribution facility that would help to reduce the reliance on third-party suppliers, extending the programme to completion in 2021. In addition, as a result of learnings during COVID-19, the expected investment to convert a site in Birmingham from a bakery to a dedicated distribution site has been deferred for a number of years.

The increased investment in supply chain, notably since FY15, has delivered a step change in Greggs’ operating efficiency, with operating costs reducing from 18.7% of sales in FY13 (ie c £143m) to 15.3% in FY19 (£179m).

As Greggs looks to double sales over the next five years there will be further investment in the supply chain, including additional production lines, a second automated freezer and more distribution capacity. Management is in the process of determining the optimal locations for future capacity.

In addition to the investment in infrastructure above, which has constituted the bulk of capex (see Exhibit 6), Greggs has invested in technology and processes to free staff time to devote to customer service, improve food availability as well as deriving efficiencies. In FY14, Greggs selected SAP as its core enterprise resource planning (ERP) software and began to install the necessary infrastructure in FY15. Following the deployment of SAP Finance in FY16, the company successfully rolled out its central forecasting and replenishment process in FY17, replacing the traditional, shop-based, manual ordering process. In FY18, the modules for human resources and property management were implemented, ahead of the migration of payroll processes in FY19. Through FY20 and FY21 the focus was on rolling out SAP to new locations such as the distribution centre in Wiltshire, which is now almost complete. Management believes the core IT infrastructure is well invested, therefore in the next five years the focus of technology spend will shift to a greater focus on digital engagement with customers, as well as ongoing investment in making operations more efficient and systems upgrades.

The expected capital investment programme to support the aspiration to double revenue by FY26 was quantified at the time of the CMD in October 2021 at c £890m from FY22–26, with peak investment of £214m in FY24. Note FY21’s actual investment in fixed assets and intangibles amounted to £54.3m versus the guided £65m.

In absolute terms, investment in IT and other will broadly double to £15m from the typical £7–8m of more recent years.

Chief executive: Roger Whiteside. Roger was appointed as chief executive in February 2013 and set out his vision for the brand’s transformation in August 2013. Roger will retire and step down from the board at the AGM in May 2022 and will remain to support the transition process to the new CEO until 5 January 2023.

Chief executive designate: Roisin Currie. Roisin became CEO designate from 1 February 2022, having been retail operations director since 2017 and property director since October 2021, with responsibility for Greggs’ retail operations and its central support team. She also leads the development of the shop estate and the delivery business. Roisin has been a member of the operating board since 2010 and has played a key role in the development of the recent strategic plans. She has been with Greggs since 2010, as group people director until November 2021, following 19 years as retail people director at Asda Wal-Mart.

Finance director: Richard Hutton. Richard qualified as a chartered accountant with KPMG and gained career experience with Procter & Gamble before joining Greggs in 1998. He was appointed FD of Greggs in May 2006. He is also a non-executive director of The Lakes Distillery Company and a director of Business in the Community.

We see the main sensitivities as:

Greggs reported sales for FY21 (the 52 weeks ended 1 January 2022) of £1,230m, c 2% ahead of consensus of c £1,210m at the time of the trading update in January 2022 (source: Refinitiv). Therefore, despite the disruption caused by COVID-19, FY21 revenue was c 5% ahead of FY19’s £1,168m. FY21 included a two-year l-f-l growth in company-managed stores of 0.8% for Q4, taking the decline for the full year to 3.3%, the latter reflecting the weaker start to the year due to COVID-19 related lockdowns. We show below how Greggs’ two-year l-f-l growth in company managed stores progressed through FY21.

The better-than-expected sales for Q421 led management to upgrade FY21 guidance again to slightly ahead of its previous expectations, that is less than 5% ahead of consensus expectations, which were PBT of £141.4m at the time (source: Refinitiv). This represented an impressive performance with stated good cost control and given the general pressures on input costs, exacerbated by staffing and the supply chain issues and earlier investment in staff pay. To reward in-store staff for their performance in difficult circumstances, management brought forward the required National Minimum Wage increase from April 2022 to November 2021.

Below we show our estimates of the likely phasing of the incremental revenue in order to reach management’s ambitious FY26 revenue target of £2.4bn. We include a relatively linear rate of growth from expanding the estate (subject to the maturing of new space) and more back-end weighting for revenue from new dayparts and distribution channels. With an implied average growth rate from management’s guidance of c 15% pa, the phasing produces higher rates of growth in the earlier years. Note the FY21 starting base of c £1,230m compares with ‘c £1,200m’ at the time of the CMD in October 2021.

Our new forecasts for FY22–24 are as follows:

We forecast mid-teens revenue growth in each year from FY22 to FY24, to £1,429m in FY22, £1,630m in FY23 and £1,902m in FY24.

The rules on VAT chargeable on the different categories of food and non-alcoholic drinks are too extensive to detail here, but to generalise, the rate of VAT on food and non-alcoholic drinks was reduced from the standard rate of 20% to 5% from July 2020 to September 2021, increased to 12.5% from October 2021 to March 2022, and should revert to the standard rate from April 2022. Greggs passed on the reduced VAT to customers on some products (eg single items) but not others (eg some meal deals), therefore this represents a headwind as the rates of VAT revert to more normal levels, quantified as c 2%.

Greggs sells products to franchise partners (eg petrol retailers) and wholesale partners (solely Iceland) as well as charging a licence fee, a percentage of its gross sales, to franchisees. Pre-opening capital fit-out costs are recharged to the franchisee and are recognised as income on completion of the related fit-out.

B2B has become a more important contributor to Greggs’ revenue and profitability, representing c 11% of group sales in FY21 versus 7% in FY17, as the number of stores has increased at a greater rate than company-managed stores. B2B sales performed better than company-managed stores during periods of COVID-19 related restrictions as the locations were, mainly, able to trade with fewer restrictions.

The relative economics of an average company-managed store versus a franchise in FY19 are shown in Exhibit 11. Although the company-managed store generated a lower percentage shop-level cash contribution of 22.8% (£142k/£627k) versus a franchise 24.9% (£55k/£221k), it produced a marginally higher percentage shop contribution after support costs of 17.7% (£111k/£627k) versus 17.2% (£38k/£221k), and a higher average cash return, 42% versus 33%.

Greggs has delivered average gross margin leverage (drop through of incremental revenue to gross profit) of just over 70%, with a gradual improvement in gross margin to 64.7% in FY19 before COVID-19. In H121 there was marginal food, packaging and cost inflation but cost inflation on food and energy increased to the end of the year. FY21’s gross margin of 63.6% versus FY19’s 64.7% reflects the dilutive effect of delivery sales, which we expect to continue with reductions of 40–50bp pa for FY22–24.

At the FY21 results, management indicated cost headwinds are increasing for FY22. In aggregate management expects like-for-like cost inflation of 6–7%. Food and energy costs are expected to be a significant headwind for FY22. Greggs has five months’ forward cover on food and packaging, and nine months’ forward cover on energy prices, and management noted significant uncertainties remain, particularly given the recent volatility in prices due to the war in Ukraine. Overall wage and salary inflation is expected to be 4.3% in FY22, versus 3.0% in FY21, prior to the additional national insurance contribution of 1.25% from April 2022. On the more positive side, Greggs continues to enjoy more favourable, ie lower occupancy costs given its strong covenant. Management believes that its price advantage to its competitors has increased in recent months, despite increases in prices at Greggs. Therefore, future price rises to recover some input cost inflation are likely.

FY21’s profitability was helped by COVID-19 related business rates relief during the first six months (£15m in H121 equivalent to about one margin point, on top of £19m in FY20). Therefore, as business rates return for the whole of FY22, to compound the expected underlying costs inflation, management does not expect material profit progression in FY22. Greggs repaid all other government financial support received through COVID.

Over the long term, Greggs has enjoyed leverage of operating costs, albeit the adoption of IFRS 16, with a new depreciation charge (c £53m in FY20) for right-of-use assets in place of prior operating lease costs, makes comparison before and after FY19 difficult. We expect further leverage of operating costs, helped by the growing importance of delivery. Following FY21’s operating profit of c £153m (margin 12.5%), we forecast a modest improvement to £154m (margin 10.8%) in FY22, £173m (margin 10.6%) in FY23 and £196m (margin 10.3%) in FY24.

Greggs has a progressive dividend policy with a typical dividend cover of 2x versus diluted EPS, and has paid a number of special dividends since FY13. The ordinary dividend was suspended on the initial COVID-19 outbreak (the proposed final dividend for FY19 was cancelled) until being reinstated at H121 (15p/share versus 11.9p/share in H119), sooner than we originally expected given the better rate of trading recovery, and subsequently declared a new special dividend of 40p/share as well as a FY21 dividend of 57p per share despite the required capital investment requirements over the next few years.

The general long-term improvement in Greggs’ profitability has been the key driver of its improving free cash flow generation relative to sales, prior to the initial outbreak of COVID-19 in FY20. Working capital typically represents an inflow to cash flow as the business grows, and fixed capital investment has been a relatively consistent 6–8% of revenue over the long term. Our capex assumptions for FY22–24 are in line with management’s guidance.

Greggs typically operates with a net cash position excluding leases at the year-end of £50m to support working capital commitments. At the end of FY21 Greggs had a closing cash position of £198m. Over the next few years Greggs will likely carry a high year-end cash position as it moves through its peak of capital investment. The adoption of IFRS 16 led to the recognition of lease liabilities of £276m at the end of FY19, which grew to £283m by the end of FY21. We assume Greggs’ IFRS 16 liabilities grow in line with the number of company-managed stores.

Our £31.60 valuation for Greggs’ share price is derived using a DCF-based valuation.

Our 10-year DCF assumes Greggs achieves its FY26 revenue target, with an EBIT margin of 10.3%, followed by a rapid fade down to 3% revenue growth in our terminal year, FY31, and then assumes 2% terminal growth. Beyond the indicated capital investment programme, we assume investment in fixed capital (5% of sales) and working capital (1% of sales) are in line with historical trends. In addition, we include an outflow for the imputed capex for right-of-use assets (3% of sales), which takes the total investment in in fixed assets to 8% of sales. We factor in a cost of capital of 8.2% (risk free rate 1.2%, market premium 6% and company beta 1.3 (source: Refinitiv)). Below we show the sensitivity of the valuation to differing terminal growth rates and cost of capital assumptions.

At £31.60, Greggs’ EV/sales multiples would be 2.3x for FY23, 2.0x for FY23, and 1.7x for FY24, and the P/E multiples would be 26.8x, 25.8x and 23.3x respectively.

In Exhibit 14 we show Greggs’ sales growth, profitability and valuations versus three peer groups of companies: UK restaurants and pubs, US restaurants and UK food retailers, all annualised to Greggs’ December year-end. The EV-based multiples include the capitalisation of leases.

Our forecast revenue growth for Greggs of 16% in FY22 and 14% in FY23 compares favourably with the majority of the peers in both periods. Growth rates in CY22, particularly for the UK pubs and restaurants, are elevated given the negative effects of COVID-19 in FY21 and subsequent expected recovery. Our estimated EBIT margins for Greggs in FY22 of 10.8% and 10.6% look attractive versus the medians for the UK restaurants and pubs (8.7–8.8% in both years), and food retailers (4% in both years) but lower than the US restaurants (c 18–19%), which tend to have a more global presence and business model, for example including high levels of franchises.

The Greggs share price is trading at a premium to its UK-based peers on most metrics, which we believe is justified by its better expected revenue growth rate and profitability.

Below we show Greggs’ historical and prospective EV/sales and P/E multiples since 2013 when the new strategy was introduced. For the historical multiples, we show the high, average (quoted) and low multiples for reported results in the respective year. Our calculation of enterprise value (EV) excludes IFRS 16 liabilities to enable a direct comparison across time, and therefore the indicated EV/sales multiples differ slightly to the prior section, which includes IFRS 16 liabilities. Exhibit 16 excludes FY20 due to the reported loss.

The higher growth rates and improved profitability since FY13 have been reflected in a gradual increase in multiples through FY19 and FY20. The current EV/sales multiples for FY22e (1.5x) and FY23e (1.3x) compare with 1.6x in the more recent, non-COVID-19 affected FY19. Similarly, the current P/E multiples for FY22e (19.7x) and FY23e (19.0x) are at a premium to the long-run average (17.9x), but a discount to FY19’s (non-COVID-19 affected) peak multiple of 27.6x.