Greggs Earnings: Under the new Chairman

Greggs has managed to avoid some of the effects of inflation with long-term contracts, but they are coming to an end, and now the focus shifts to the outlook.
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A look at the fundamentals

Most recently, Greggs affirmed its outlook for the whole year. By then, inflation was already biting consumers, yet the company maintained healthy margins. In the first four weeks of Q3, LFL revenue was up 13%.

Gregg's "food on the go" emphasis caters for people on the way to and back from work. So, the company's outlook often correlates with employment numbers. In fact, something underscored by former Chairman Ian Durant, who forecast that as long as employment figures remained positive, the company was confident in its outlook. Sales figures show that it hasn't faced significant obstacles in passing rising costs on to consumers"

A look at the future

Starting last Saturday, the firm has been under new management, and tomorrow's trading update will be the first formal statement by the new Chair Designate, Matthew Davies. So, investors will be keen to see what in the outlook remains the same or if there is a new direction.

One specific issue to address is forward contracts, which the firm typically negotiates for a year ahead. Contracts have been rolling off through the year, with new ones at higher prices.

However, traders shouldn't expect the company to announce specific figures about margins tomorrow. What traders can expect is an update on shop numbers. So far, the company has managed to expand its footprint. But a sign that margins might be under pressure would be a slowing down in storefront openings or a revision to the guidance for the rest of the year.

Greggs stock price under pressure

The stock price of Greggs is not indicative of relatively strong earnings performance whatsoever. Since day one of 2022, it has been on a downward spiral, correcting nearly 77% of the gains pocketed in Q4 2020 when it was trading at 1115. The medium-term path suggests further downward legs towards the low mentioned above—the 78.6% Fibonacci retracement of the 1115-3450 at 1650 must succumb first. And this should be followed by a move below the 1450 support.

The golden pocket at the 2000 round resistance will be a solid level bulls need to recapture for any sort of medium-term respite. Apart from being a Fibonacci level and a psychological level, it is near the 50-day average. If momentum supports the bullish thesis, the 50% Fibonacci makes up the next cluster with the 200-day average at 2300. An RSI divergence adds to any bullish bias.

Key takeaways

Despite rising inflation, Greggs expects strong growth for the rest of the year as it managed to pass rising costs on to consumers. Under new management, the new boss will announce the firm's plans for the future tomorrow. One issue traders will be keen on is how the new higher-price contracts might impact margins. However, without an actual announcement around margins, attention might be on the expanding store footprint where there could be indirect signs that margins might be under pressure