Berenberg downgrades Greggs on weaker LFL growth

Greggs’ weaker like-for-like growth at the start of 2018 and management’s cautious outlook suggest near-term performance could be more subdued, Berenberg said as it cut the stock to ‘hold’ from ‘buy’ and reduced the price target to 1,225p from 1,425p, adding that this could cause a delay in the special dividend.

Berenberg upgraded the bakery chain to ‘buy’ last summer on the basis that it would continued to delivering strong LFL growth, structural growth in the food-on-the-go market would support significant site expansion and that there was potential for additional capital returns.

It noted that following the recent trading update, the stock is broadly flat since the upgrade.

"Thus, although we still like the company on a long-term view, given the limited near-term growth the entry point does not look as compelling as it did previously. As such, we downgrade to hold."

Greggs updated the market on Thursday, reporting that LFL growth fell from 3.2% in the first eight weeks of 2018 to just 1.3% in the first 18 weeks, on the back of severe weather and weak customer footfall in retail locations.

Excluding the Beast from the East week in February, LFL growth was around 2.2% during the period, implying the underlying slowdown is less stark, according to Berenberg, which said performance is still not as strong as it has been in recent periods.

Berenberg now expects that Greggs will end 2019 with £55m net cash. As the company aims to maintain at least £40m net cash, the bank no longer reckons it would have capacity to pay a special dividend in that year unless it completes the sale of the closed bakery in Twickenham.

At 1255 BST, the shares were down 0.5% to 1,061p.