Greggs ($GRG): Still Extremely Undervalued
I first wrote about Greggs in August 2025, when the stock was down 50% in a year.
The core thesis was simple: Greggs operates one of the largest QSR networks in the U.K., and it wins through simplicity, scale, and vertical integration. That allows Greggs to price more aggressively than competitors while still generating strong unit economics. Mature stores earn roughly a 25% annual cash ROIC, and the brand has a cultural fit in the U.K. that is hard to replicate.
The opportunity existed because investors are uneasy. Concerns around the British macro backdrop, Greggs’s negative free cash flow, and declining returns on capital have led many to question the business.
This morning, Greggs released its Q4 trading update. While we will not get full financials or management commentary until March, the update provides enough new information to revisit the thesis and reassess the valuation.
Greggs’s Q4 Was Business As Usual
Greggs’s Q4 revenue increased by 7.4%, with same-store sales up 2.9%. For the full year, revenue rose 6.8% to £2.15 billion, with same-store sales up 2.4%.
Greggs noted that while market conditions remain challenging, the company continues to take market share from competitors.
Roughly 7% revenue growth was expected, and management’s guidance of “modestly lower” operating income for the full year compared to 2024 remains unchanged. (Since this is a trading update, profit figures are still undisclosed.)
Greggs opened 121 net new shops, bringing the total store count to 2,739. As a reminder, the long-term goal is to reach 3,500 shops in the U.K.
There are plans for international expansion, but these are still early. Management is being careful not to repeat the same mistake made in 2008, when Greggs entered Belgium but exited quickly after disappointing results.
The focus remains firmly on the U.K., as management expects to open another 120 net new shops in 2026. At this pace, the company would reach its 3,500-shop target in about 6 years.
Importantly, management guided for “significantly reduced capex” in 2026. The current investment cycle, which centers on expanding the supply chain with new national manufacturing and distribution centers opening in 2026 and 2027, has passed its peak. Management expects capex to decline further in 2027.
This is a critical part of the thesis. As you’ll notice in the semi-annual cash flow chart below, free cash flow has trended downward, while operating cash flow has held up relatively well.
This reflects Greggs’s rapid and heavy investment in capital to support future growth. Not only free cash flow, but also returns on invested capital have been under pressure as a result. As the supply chain is built out, invested capital increases, while the benefits have yet to show up. A major facility will open in 2026, followed by another in 2027. Only then will we gradually begin to see the impact on profitability.
This aligns with management’s view:
“As our capex levels moderate, we expect to revert from net cash consumption to net cash generation. Meanwhile, continued store growth, our strategic focus on driving LFL performance and our ongoing cost initiatives will ensure that return on capital recovers towards target levels.”
That said, there are already some tangible benefits coming from improvements across the supply chain. Greggs reduced costs by £13 million through efficiency gains, driven by further integration of the supply chain and other business processes. These cost savings are expected to continue into 2026.
This won’t just flow down to the bottom line. Rather, Greggs is using these savings to “maintain attractive pricing by providing some mitigation to input cost increases.” This is a key lever in staying competitive as inflation persists.
On the positive side, Greggs expects inflation to be lower in 2026 than in 2025.
To reach its 3,500-store target, Greggs has been experimenting with different formats and locations. This includes partnerships with supermarkets, where Greggs operates in-store locations, as well as further expansion into travel hubs. The latest addition is the Bitesize Greggs format, a smaller store concept aimed at space-constrained, high-traffic locations such as railway stations.
It is strange, though, because Greggs has already expanded into travel hubs and tight-footprint locations. Many existing stores are already small and optimized for speed and high turnover. I’m not entirely sure if these Bitesize stores are even smaller, or whether this is primarily a way to charge higher prices under the guise of convenience.
Finally, despite efficiency gains and easing inflation, Greggs still expects 2026 profit to be broadly similar to 2025, assuming no consumer recovery. This is partly due to additional costs associated with expanding supply chain capacity, which will place temporary pressure on margins. This is nothing new, though: new facilities bring upfront depreciation and operating costs, while the benefits arrive later.
All of this means that the thesis is still firmly intact and may even play out sooner than I expected, with capex already set to drop meaningfully in 2026. Even so, shares are down roughly 8% today, as investors react negatively to profit guidance and the lack of stronger like-for-like sales growth.
It also doesn’t help that Greggs is the most shorted stock in the U.K. It will take time for the market to recognize the inevitable rebound in free cash flow.
Because here is the key point: in a normal year, Greggs has shown it can generate more than £300 million in operating cash flow.
If the company were to pause reinvestment, capex would fall to maintenance levels only, which management estimates at roughly 5% of revenue.
5% of £2.15 billion is about £108 million in capex. Against operating cash flow of around £300 million, that implies more than £200 million in free cash flow.
I’m not just speculating here. Greggs has done this before. In 2021, operating cash flow reached £286 million, while free cash flow totaled £183 million.
£200 million in free cash flow equates to a staggering free cash flow yield of 12%+.
That is the valuation. It can be that simple.
This is why I believe Greggs remains extremely undervalued, especially now that shares are down after the trading update.
Thanks for reading.
Lucas
Author & Founder, Summit Stocks
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Disclaimer: the information provided is for informational purposes only and should not be considered as financial advice. I am not a financial advisor, and nothing on this platform should be construed as personalized financial advice. All investment decisions should be made based on your own research.
Great post. I only learnt about this company a couple days ago and when I looked at the current valuation I imagined it was a stable if not slightly declining business. The fact that it was, and frankly still under the hood, is a growing, vertically integrated retailer at 11x earnings was really surprising to me. I think this is, exactly as you say, a situation in which we don't even need to forecast (aggressive) growth for the valuation to make sense. With their products being cheaper priced than any "real" alternative it's hard to imagine them being hurt a lot in a worse economic conditions, let alone when compared to alternatives.
Going to do more research but I really struggle to see a strong bear case. Even if the expected increase in '26/'27 FCF is already calculated in, I don't see any problems with adding on for some time to come if the market doesn't appreciate the stock. Thanks again for the post!
Greggs stock make me believe the market is extremely short sighted. Good summary, thanks