Greggs' Share Price Drop: A Mispriced Opportunity or a Warning Signal?

Greggs PLC (LON: GRGS), the UK's largest bakery retailer, has seen its share price decline by over 12% in the past six months, sparking debates among investors about whether the drop reflects undervaluation or a warning of deeper structural issues. The company's recent financial results highlight a paradox: robust sales growth driven by aggressive expansion, but eroding profitability due to cost inflation and operational headwinds. For long-term investors, the critical question is whether Greggs can sustain its growth strategy while navigating a cost-driven sector downturn.

Financial Performance: Sales Growth vs. Margin Pressure

Greggs reported a 7.0% year-on-year sales increase to £1.0277 billion in the first half of 2025, with like-for-like (LFL) sales rising 2.6% for company-managed shops and 4.8% for franchised outlets. However, operating profit fell 7.1% to £70.4 million, and pre-tax profit dropped 14.3% to £63.5 million. The primary culprits? Rising operational costs, including a 5.4% inflation rate in the first half of 2025 (projected to hit 6% for the full year), and a 30% surge in finance expenses to £8.2 million.

The company's capital expenditures also spiked to £172.1 million, driven by the construction of two national distribution centers in Derby and Kettering. While these investments aim to future-proof Greggs' supply chain, they've exacerbated cash flow pressures, leaving the company with a net debt position of £2.5 million by mid-2025—a stark contrast to its £125.3 million net cash position at year-end 2024.

Industry Context: Sector-Wide Struggles or Company-Specific Risks?

The UK bakery retail sector is grappling with a perfect storm: rising labor costs (driven by a 15% employer National Insurance contribution hike and a £12.21/hour National Living Wage), commodity inflation, and intensified competition from supermarkets. Greggs is not alone in facing these challenges. For instance, Gail's and Paul UK Ltd, two of Greggs' premium rivals, have also adopted cost-cutting and premiumisation strategies to offset margin erosion.

However, Greggs' situation is uniquely complex. While its LFL sales growth outpaces many competitors, its margin pressures are acute. Analysts estimate that the National Living Wage hike alone will add £45 million in costs in 2025—nearly 22% of its 2024 pre-tax profit. Meanwhile, the company's aggressive expansion—31 net new shops in six months—risks overleveraging its balance sheet.

Strategic Resilience: Innovation and Diversification

Greggs is countering these challenges with a dual strategy: convenience-driven innovation and supply chain optimization. The company's new "Bake at Home" frozen range, launched in partnership with Tesco in September 2025, targets households seeking ready-to-cook meals—a market segment with higher margins and less footfall dependency. Additionally, Greggs is testing drive-through units, which have shown 15% higher average transaction values than traditional stores, suggesting untapped potential in urban and transport hubs.

The company's supply chain investments, though costly, aim to reduce delivery costs and improve product consistency. The Derby and Kettering distribution centers are expected to cut logistics expenses by 10–15% annually by 2026. Roisin Currie, Greggs' CEO, has emphasized a "disciplined estate expansion" approach, balancing new store openings with closures of underperforming locations.

Investor Considerations: Opportunity or Risk?

For value investors, Greggs' 12% share price drop may appear attractive, especially given its strong sales growth and strategic pivots. However, the company's earnings per share (EPS) are projected to decline by 2% in 2025 due to margin pressures, and its debt load remains a concern.

A key risk is the sustainability of its expansion. With 140–150 new stores planned for 2025, Greggs must ensure that each location generates sufficient revenue to offset high initial costs. If same-store sales growth slows further (from 1.7% in early 2025), the company's profitability could stagnate. Conversely, successful execution of its convenience-focused strategy—particularly in drive-throughs and frozen food—could unlock new revenue streams and justify a higher valuation.

Conclusion: A Calculated Bet

Greggs' share price drop reflects both the company's operational challenges and the broader sector's struggles. While its aggressive expansion and product innovation are commendable, investors must weigh the risks of margin compression and overleveraging against the potential rewards of a diversified, convenience-driven growth model.

For those with a 3–5 year horizon, Greggs could be a speculative buy if it successfully executes its supply chain upgrades and gains traction in the frozen food market. However, the stock is not for the faint of heart. A more conservative approach would involve monitoring its 2025 EPS guidance and debt-to-EBITDA ratio, which currently stands at 2.1x—well within safe limits but under pressure from rising costs.

In the end, Greggs' story is one of resilience. Whether its current challenges are a temporary setback or a sign of deeper vulnerabilities will depend on how well it balances growth with profitability in the months ahead.