Greggs (LSE: GRG) shares delivered one of their most dramatic monthly performances in recent memory, closing July up 21% after a remarkable mid-month run.
The stock posted a 16% single-day gain on 29 July, its biggest one-day move in five years, following the release of its latest trading results.
A partial retreat on Friday trimmed some of those gains, but the stock still finished the month sharply higher, leaving investors and analysts reassessing the outlook.
Before Wednesday’s report, sentiment around the bakery chain had turned deeply negative, with hot weather, higher employer National Insurance costs, and weak like-for-like sales all weighing on the shares throughout the year.
Short interest had climbed dramatically, with roughly 12.5% of Greggs shares out on loan, making it one of the most shorted stocks in the UK market.
The headline numbers from the results were solid rather than spectacular, with total sales rising 7.2% but like-for-like growth coming in at just 2.1% in company-managed shops and 1.3% in franchises.
Most of the company’s sales growth came from opening new stores, though management cut guidance for new openings to 100 to 110 this year, down from an earlier target of 120.
The most encouraging aspect of the report was improving product performance in warmer weather combined with easing cost inflation, which helped operating profits jump 22.9% to £86.5m.
Analysts point out that the results themselves were not the primary driver of the outsized share price reaction, with the real story being the starting point heading into the report.
With shares trading at a price-to-earnings ratio of just 12 before the results, the stock had already priced in a level of bad news that ultimately did not fully materialise.
The elevated short interest then amplified the move significantly, as results that were merely acceptable were enough to force a scramble among short sellers to buy back borrowed stock.
Greggs still holds genuine long-term competitive advantages, most notably the scale efficiencies that give it a lower cost base than many rivals in the food-to-go market.
Its fast inventory turnover also provides a degree of resilience against unpredictable weather, since food products clear shelves far more quickly than, for example, seasonal clothing ranges do.
With store growth now slowing, however, the long-term investment case increasingly depends on whether investors are paying the right price for a maturing business rather than a rapidly expanding one.
At a P/E ratio back above 16 following July’s sharp re-rating, the growth on offer from Greggs looks somewhat thinner than it did when the stock was trading at much lower multiples just weeks ago.
