Hot or not: Are soaring temperatures really behind Greggs’ unexpected profit warning?

The City was taken by surprise this morning, when the food-to-go giant blamed soaring temperatures in June for a slump in footfall, alongside stronger year-on-year comparatives and ballooning refurbishment costs.

As a result, the retailer said, it now anticipates full year operating profits to be “modestly below” what they achieved in 2024, even as like-for-likes would be “less demanding in the second half” of the financial year.

While Greggs didn’t put a figure on how it was expecting profits to dip, analysts Peel Hunt have predicted a c.£10m drop from the current c.£187m consensus.

As a result, Greggs’ share price nosedived, down over 14% at time of writing. So, what’s going on?

Too hot to handle

The profit warning this morning was all the more unexpected, because prior to this, it appeared that Greggs was destined to go from strength to strength.

In it’s recent update for the 20 weeks to May 17, Greggs was reporting surging sales amidst “better trading conditions” for the brand. Total sales for that period were up 7.4% to £784m.

Greggs said at the time that product innovation had been driving this growth, particularly the strong performance of ranges such as its pizza boxes, hot food and, most pertinently to this latest downturn, over-ice drinks.

The good times seemed to continue to roll for Greggs throughout the rest of May, but it seems the wheels came off as summer kicked off in June. The retailer noted this morning in particular that like-for-like “sales in June were impacted as very high temperatures affected the UK, increasing demand for cold drinks but reducing our overall footfall”.

Now, to be fair to Greggs, the overall footfall picture for the UK in early June wasn’t particularly rosy – even if the weather was more pleasant than the roasting temperatures seen during the recent heatwave.

Total UK footfall fell by 1.7% across the month of May, according to the most recent monthly BRC-Sensormatic footfall monitor.

Most tellingly for Greggs, high street footfall slipped 2.5% during the period, while retail park footfall also saw a 0.2% drop off – both compared to 7-plus percentage point increases in the previous month of April.

Value meltdown

While the heat has definitely had an effect, City analysts believe that it’s, ironically, just the tip of the iceberg for Greggs’ downturn.

Analysts say that Greggs has struggled so badly in the last few weeks because it has lost its value perception with customers, at a time when numerous food-to-go high street chain rivals have been leaning into price.

“Greggs’ like-for-like volume decline is not a new phenomenon,” says Third Bridge analyst Alex Doran. “While recent hot weather played a role, a deeper issue lies in customer dissatisfaction with steep price hikes and a shift away from Greggs’ traditional value-led menu proposition.”

Peel Hunt analysts Jonathan Pritchard, John Stevenson and Ruben Pathmanathan all agree.

“Certainly, Greggs has been impacted adversely by the short-term hot weather,” they said. “But we also retain concerns around the group’s relative value proposition being eroded in the eyes of consumers”.

Greggs has raised its prices twice in the current year – first in January and again in May. A sausage roll is now £1.45 at the retailer, compared to just 85p in 2016 and £1 in 2021.

Overheated and overstretched?

Another issue that a number of analysts have noted is that Greggs is overextending itself with its medium-term store opening ambitions.

Greggs said that during the most recent period, it had opened 87 new stores and closed 56, leaving it with a total of 2,649 stores across the UK. The retailer also said it remained confident of achieving its target of between 140 and 150 net new openings this year.

Peel Hunt said it retains “concerns on [Greggs’] ambitious space growth plans”, while Third Bridge’s Doran is blunter.

He believes “Greggs has likely surpassed its optimal store count” and says that “instead of continuing to open new sites at the current pace” the brand should “focus on refreshing its aging store estate”.

While Greggs has completed 108 store refits in the first half of the year, with another 50 planed for the remainder of the year, Doran’s point is an interesting one. Has the UK reached peak Greggs?

But it’s not all doom and gloom at Greggs. The financial results, profit warning aside, were still healthy: like-for-like sales up 2.6% and total sales up 6.9% in excess of £1bn.

“The recent good weather has undoubtedly been a factor in sector trading,” Jefferies analyst Andrew Wade says. “While obviously disappointing that FY expectations are nudging back, we do not see this as a reflection of the underlying health of the business, and it does not change our view on the fundamentals”.

Investec analyst Kate Calvert agrees saying that while “a return to positive like-for-like volumes is needed in the short term to restore confidence,” she doesn’t believe “current valuation… reflect the longer-term growth potential” of the brand.

All eyes will now turn to Greggs’ interim results on July 29 to see whether this is just a flash in the pan, or something to really sweat about.