Greggs' share price is falling as sales continue to grow. What's going on here?

I Greggs (LSE:GRG) share price fell 4% on Tuesday 1 October after the company's latest update. But the news about sales growth, inflation, and the full-year outlook are reasonably positive.

Greggs has been one of the UK's best performing stocks over the past decade. So that means there is a rare opportunity to consider buying shares in FTSE 250 a bakery chain?

Buying opportunities?

Over the past 10 years, Greggs shares have outperformed all major indexes. If I had invested £1,000 in stocks back in 2014, my investment would be worth £5,106 today.

However, during that period, clear buying opportunities were rare. Despite the pandemic, it has been a challenge to find a stock trading at a price-to-earnings (P/E) multiple of less than 17 times.

There are several investor courses out there. Another is that paying fair value for a really good business can be a bad investment.

Another thing is that it is important to seize opportunities when they present themselves. So as the stock goes down, it's worth keeping a close eye on the latest trading update to see what's going on.

Trading update

It's hard to see much we don't like in the latest report, but I think the key is sales growth. Net sales in the third quarter were 10.6% higher than last year and like-for-like sales were up 5%.

Those are undeniable numbers, but context is everything. Year-to-date, net sales grew 12.7% overall and 6.5% like-for-like.

That means sales have been growing at a slower pace for the past quarter. And in a stock like Greggs – priced to reflect growth expectations – that's not what investors are looking for.

Despite this, management has maintained its guidance throughout the year. The question for investors, however, is what the long-term vision of the business is.

Outlook

Gregs is aiming for 3,000 locations and is making good progress with this. It's important to note, however, that the incremental impact of adding more stores diminishes as the company grows.

Over time, I expect growth to be driven by the company's ability to (a) sell more products and (b) increase prices. And I think the second of these should give investors reason to be optimistic.

At low prices, small increases can make a big difference in profits. Taking the price of a steak bake from £2 to £2.10 generates 5% more revenue for added costs.

Of course, there is always the possibility that higher prices deter consumers, but I think the risk of this is limited if the increase is small in absolute terms. And this gives me hope going forward.

Is this a buying opportunity?

As I see it, Greggs has clear opportunities ahead. But the market's reaction to the latest trade update should give investors a clear indication of what could happen if the growth rate slows.

An expansion of 3,000 stores is a clear path to growth in the short term. After that, I think the important question is how much the company can use its pricing power to continue moving forward.

It's not clear to me that this is enough to justify a forward P/E ratio of 21 today. So I see the stock as a good opportunity to consider buying, rather than an outstanding one.