In 2024, Greggs (LSE:GRG) shares were a favourite among British investors. The UK’s largest and most-loved bakery chain continued to offer tasty on-the-go baked goods, backed by solid infrastructure supporting impressive free cash flow generation.
Skip to 2025, and the complete opposite seems to have happened. Greggs’ shares have collapsed by over 43% since January, leaving an unsavoury taste in many investors’ mouths.
What on earth’s happened? And is the stock getting ready for an explosive comeback?
Investigating the crash
There are various factors at play here. However, the primary source of concern revolves around growth. With such an impressive track record of sales and profit expansion, investors were more than happy to pay a premium for Greggs shares. But that premium quickly evaporated when the group’s historical double-digit growth suddenly flatlined.
To make matters worse, in April, the government’s Budget triggered a sudden increase in staff salaries as well as their National Insurance costs. Pair that with the persistent inflation of raw ingredients, and the company also saw its bottom line feel the pinch.
Management placed most of the blame on poor weather conditions at the start of the year, which continued into the summer. But not everyone was convinced by concerns that Greggs may have saturated its own market.
As such, with growth grinding to a halt and margins under pressure, the stock’s premium evaporated as investor sentiment soured.
Time for a comeback?
While Greggs’ shares are still seemingly unpopular with investors, the continued pessimism may have gotten a bit excessive. The group’s price-to-earnings ratio now sits at around 11, putting it close to value-stock territory. That’s despite the group’s latest results showing some early signs of recovery.
Even after a very weak start to the year, total sales have gradually recovered and have reached 6.7% in the nine months ended in September. At the same time, inflation’s starting to normalise. And when paired with recent supply chain optimisation investments, margins are seemingly on the mend as well.
Weak consumer spending in the UK is still proving to be a frustrating headwind. But should economic conditions improve and investor concerns of market saturation be overblown, Greggs’ shares could enjoy a strong rally if sentiment’s restored.
What to watch
A new distribution centre is scheduled to become operational next year. This new Derby-based state-of-the-art frozen manufacturing and logistics facility plays a crucial role in management’s long-term plan to support a larger number of locations.
Should this project suffer disruption, investor sentiment could take far longer to recover. Even more so, given that rival on-the-go food producers are also investing in their own infrastructure. So any delays could create opportunities for the competition to secure and steal market share.
There’s also the risk of inflation making an unexpected comeback or further deterioration of the UK economic environment. Both these threats could prevent Greggs’ performance from bouncing back, even with less disruptive weather conditions.
Nevertheless, if management can continue demonstrating early signs of recovery but the Greggs share price remains weak, then a buying opportunity could soon emerge for long-term investors. That’s why I’ve already added this business to my watchlist. And it’s not the only FTSE 250 stock I’ve got my eye on right now.
