Greggs profit warning was more than just due to weather, says Barclays

Barclays has significantly cut Greggs PLC's FY25 and FY26 earnings forecasts by approximately 11% and 10% respectively, reducing FY25 like-for-like sales growth to 2% and pushing profit before tax forecasts 6-7% below consensus. While Greggs cited hot weather for weaker trading, Barclays points to broader concerns including pricing strategy, potential over-expansion, and shifting food-to-go consumer behavior as contributing factors. Despite these downgrades, Barclays maintains an 'overweight' rating, albeit acknowledging prior optimism was "far too optimistic," trimming its price target 14% to 2,145p based on Greggs' integrated model and strong new location returns.

Analysis

Barclays has materially reset expectations for Greggs PLC, cutting FY25 and FY26 earnings forecasts by approximately 11% and 10% respectively, citing a combination of near-term headwinds and emerging structural concerns. The broker reduced its FY25 like-for-like sales growth forecast from 3% to 2%, pushing its profit before tax estimates for FY25 and FY26 to £171 million and £176 million, which are now 6-7% below consensus. While Greggs attributed its recent weak trading to hot weather, Barclays suggests this explanation is incomplete, highlighting deeper issues such as a potential softening of volumes following price increases, margin pressure from rising finance costs, and a broader shift in consumer behavior away from the food-to-go segment. Despite these significant downgrades and a 14% cut in the price target to 2,145p (based on a revised 17.5x FY25 P/E multiple), Barclays maintains an 'overweight' rating. This retention is supported by what the bank views as enduring long-term strengths, including Greggs' vertically integrated business model, strong returns on capital in new store locations, and its persistent value-for-money market positioning.

Key Decisions for Investors

• Investors should weigh the significant near-term risks, including softening consumer demand and margin pressure, against the new, lower valuation and Barclays' maintained 'overweight' rating.
• Monitor upcoming trading statements closely for any stabilization in like-for-like sales, as the current 2% forecast represents a significant deceleration and a key performance indicator.
• Consider the bull case, which hinges on the company's vertically integrated model and strong returns from expansion, as a potential long-term opportunity if the current consumer headwinds prove to be cyclical rather than structural.