Why is Greggs’ share price down despite resilient earnings?

Greggs’ [GRG] share price had fallen nearly 9% this month, as of Tuesday’s open, as the high street baker faces renewed pressure from COVID-19 restrictions. Adding to the pressure is an end to the government’s Eat Out to Help Out scheme and office workers being advised to stay at home, meaning fewer people grabbing a lunchtime snack. 

Lockdown already hit Greggs’ share price hard in the first half of 2020, with sales coming in at £300.6m, down 44.9% on the same period last year. This saw Greggs record a £65.2m pre-tax loss, well down on the £36.7m profit seen the previous year. 

Following the results’ publication in July, Greggs' share price fell over 19% as shareholders digested the losses. And despite a more robust update this time around, Greggs’ share price has already dipped a further 7% - by 11am Tuesday - since opening at the 12.28 level.

When did Greggs report earnings?

29 September, UK market open

What to watch out for in Greggs’ Q3 results

Greggs’ third quarter results were better than its dire half-year numbers. The baker has benefitted from reopening all of its shops, along with an easing of lockdown measures. The government's popular Eat Out to Help Out scheme has also contributed to increased sales.

In July's half-year report, Greggs said that it was encouraged by its ability to operate under social distancing measures and had seen average sales return to around 72% of pre-coronavirus figures. For Greggs to break even this year, 2020 sales need to come in at around 80% of those seen in 2019. Breaking even is not necessarily a given, though, and the autumn and winter months are likely to be challenging for Greggs. 

For Q3, the company stated that activity had picked up this month following a turgid August. And to put that break-even goal in context, in the 12 weeks to 26 September, like-for-like sales in company-managed shops averaged 71.2% of the 2019 level.

Greggs also highlighted that the firm had returned to a positive net cash position this month, however, the outlook remains unclear with “rising Covid-19 infection rates leading to increasing risks of supply chain interruption and further restrictions on customer activities out of the home.”

Moving forward and with the high street likely to remain quiet, Greggs will need to adapt its strategy. One way it is doing this is by rolling out new digital channels, such as delivery and click and collect. The amount of demand for a takeaway steak bake could go some way to offsetting any losses in future quarters.

What the analysts think

High-performing fund manager Harry Nimmo has just added Greggs back into the Aberdeen Standard Investments’ Standard Life UK Smaller Companies fund. As a Citywide AAA-rated analyst, Nimmo's picks are worth any investor considering, especially as the fund has only lost 1.5% in value this year.

Yet while Greggs is trading ahead of expectations, Nimmo has warned that UK companies face an uphill battle to recover. In Greggs’ case, Nimmo says “social distancing and quiet high streets, shopping centres, and travel hubs”, are challenges the baker still faces this year. Perhaps this is why Nimmo reduced the fund's holding in Greggs to 1.5%.

Among the analysts tracking the stock on Yahoo Finance, the baker has an average 1,340p price target. And for bargain hunters, Greggs’ share price is trading at lows not seen since October 2018. However, gains might not materialise until after the winter, when lockdown measures will hopefully ease.