Much as we would like to reprise our 'Greggs on a roll' headline the interim management statement (IMS) from the sandwiches and baked food chain did not allow us to do so.

Like-for-like (LFL) sales fell 2.6% in the 14 weeks to October 6th, and while this was an improvement on the 3.5% deterioration in the second quarter, Greggs was honest enough to say it was a smaller recovery than it had anticipated. Worse still, it expects sales to remain negative in the final quarter.

"Slightly disappointing," is Panmure Gordon's verdict on the trading update, given the lack of a sales recovery in the core business.

"However, new channels are contributing strongly and this, together with cost control, should help to moderate the effect on profits, which nevertheless could be down for the year as a whole," the broker predicts.

The consensus forecast for full-year headline pre-tax profit is £54.1m, versus £53.1m last year, but Panmure Gordon's comments suggest that forecasts are set to come down following the trading update.

Despite the share price reaction, this is not a company in trouble; just one not growing as fast as hoped.

Away from the high street

The miserable summer weather did not help, though you might have thought that shoppers would be more likely to pop into Greggs for a hot pasty to warm up and escape the rain. Greggs said flooding in parts of the country at the end of September also hit sales; I like a pasty as much as the next man, but not enough to get the dinghy out and row down the high street to get one ...

On the subject of accessibility, Greggs said it is making progress on reducing its reliance on traditional high street locations, and branching out, for instance, into motorway service stations.

"Our new shops are performing well and nearly half of these are in locations away from traditional high streets," the group revealed.

Making plenty of bread

Those of us who remember Greggs as primarily a bakery will be slightly bemused to note that the group is trying out what it calls a "new" local bakery concept shop called "Greggs the Bakery". Well, it is totally different from the "Greggs the Baker" I remember, I suppose. Be that as it may, Greggs plans to convert a further 10 shops to this format in the final quarter of 2012 and says that if they perform as well as has the first shop to be converted then it will increase its investment in the local bakery format in 2013.

The other area into which Greggs is dipping its toe is coffee shops. Inspired, perhaps, by the phenomenal success of Costa Coffee, Greggs has opened five "Greggs Moment" coffee shops this year and says it has been encouraged by the early sales performance.

It has poached Tony Rowson from Costa Coffee to lead the development of its coffee business. The vibes the management has been giving off are that Greggs will seek to undercut the competitions who, let's face it, charge ridiculous prices on the basis of calling a milky coffee a latte.

While a return to like-for-like sales growth is at least a few months off, Greggs is also having to deal with the rising cost of ingredients.

"Whilst most of our food input costs are covered for the remainder of this year, there have been rises in a number of key commodities and, looking further ahead, we expect ingredient cost increases in the first quarter of 2013," revealed Chief Executive Kennedy McMeikan.

Panmure Gordon remains a fan of the stock. "Looking ahead, we believe that Greggs has at least six years of strong organic growth and this, together with rising ROCE [return on capital employed], means that the shares are undervalued on a long term basis," the broker argues.

"We believe that a valuation in line with our target price for Majestic [Wines] of 1x sales is justifiable," the broker continued. Last year, sales just topped £701m; this year they are tipped to be in the region of £736m. The market capitalisation, meanwhile, is just under £500m.

The dividend yield is a not unreasonable 3.7% (projected to rise to 3.9% this year) and the price/earnings multiple is 13.1.
target price of 750p.

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