Down 23%, are Greggs shares a long-term bargain?

There are lots of reasons investors like Greggs (LSE: GRG), from its large customer base to a proven business model. The reality is though, that Greggs shares have performed badly of late. The price has crashed 23% in the past year and is now 10% lower than it was five years ago.

As a patient investor with a long-term investing timeframe, that has grabbed my attention. Could now be the time to buy?

Here’s what’s behind the fall

Last month, the baker announced full-year sales grew 11% to over £2bn. It also opened a record number of new shops during the 12-month period. And it said it expects last year’s results to fall within City expectations.

That all sounds pretty positive. So what has been going on with the share price? The main concerns, as I see it, relate not to how Greggs has been doing but what its medium-term future prospects are.

Fitting out those shops takes money, for example, and Greggs ended the year with £125m of cash versus £195m at the same point a year beforehand.

With plans for 140-150 new shops, even allowing for ones that are closing, this year looks set to be another one of Greggs growing its estate. That takes more money.

Meanwhile, the company pointed to higher employment costs this year leading to inflation.

Thinking for the long term

Still, as the company points out, it has been spending money to support what it describes as an ambitious growth plan. It says the long-term opportunity for the business remains “significant”.

I agree. There is still a lot of room for expansion in the store estate in the UK alone. Beyond that, opening longer hours to serve a wider range of meal occasions could be another growth opportunity. Greggs has been doing that more over recent years, but I think there is still untapped potential.

The brand is strong and I think the chain has a unique value proposition in a food market that is likely going to be resilient over the long term, albeit declining numbers of people on some high streets could require further reshaping of the shop estate.

But for now, the market seems more focused on the risks than the potential ongoing growth story. Greggs shares have now fallen to a level where they trade on a price-to-earnings (P/E) ratio of 16.

This is a quality business I would be happy to invest in if I could buy at an attractive price. So are Greggs shares currently priced cheaply enough for me to make a move? No.

I see an ongoing risk this year due to higher wage costs and that could eat into earnings. Meanwhile, sales growth slowed at the end of last year and I see a risk that a weak economy could hurt sales growth this year.

Although Greggs shares have become cheaper, for now I am still holding off buying. I am keeping an eye on the share price and company performance though. If the price keeps falling I can see it potentially hitting a level where I would happily buy for the long term.