What can grocery retain after COVID-19? (KR)
Kroger reported an FQ1 EPS of $1.19, ahead of consensus expectations of $1.01. Better OG&A expenses drove the upside. ID sales ex-fuel fell 4.1%, less than consensus expectations of -6.7%. Digital sales grew 16%, lapping 92% last year.
Gross margins contracted 65bps on a FIFO basis. Sales deleverage, lower shrink, and a PPE writedown. Sourcing benefits and alternative profits offset pricing investments and mix changes. Alternative profits are expected to contribute close to $150M in incremental profit this year. On a two-year basis, gross margins contracted 20bps with ID sales up 14.9%. The fuel margin was $.35 per gallon compared to $.48 last year. Fuel profits will continue to be a YOY headwind in the future. Management said they did not see much inflation in Q1 but started to see it in Q2. Q2 was still is not at the 1-2% level they expect for the year. OG&A decreased by 110bps due to lower pandemic costs, fewer multi-employer pension contributions, and lower incentive costs.
Management raised EPS guidance from $2.75-2.95 to $2.95-3.10, reflecting the upside in Q1. ID sales are now expected to be down 2.5 to 4% compared to down 3 to 5% previously. Q2 is expected to be within the guidance range for the year, while the 2H is expected to be at the high end or better.
The pandemic restrictions lasted longer than expected, so it should be no surprise that the changes in consumer behavior and the shift to at-home meal consumption will take longer to unwind. The negative SSS and gross margin contractions will continue into F2022. The shift back to away from home consumption is underway, and it will be drawn out. Kroger had gross margin contractions during the pandemic, the best grocery environment. It will continue to have gross margin pressure from sales deleverage, price investments, higher shrink, and the mix shift to online. The gross margin outlook calls into question whether the sector can retain any profitability gains from the pandemic.
Grocery demand falls after Memorial Day weekend (ACI)
CPG demand fell 5% YOY for the week ended June 6 decreased 5% YOY as seen in the chart below. The previous week was up 2% YOY driven by the Memorial Day weekend, the first and only increase since lapping the beginning of the pandemic in March. Edible demand and non-edible demand were both down 5% YOY. Beverage alcohol sales were down 9% YOY, down from +2% in the previous week. Produce demand, which is a good proxy for home meal consumption, was down 3% YOY.
Is hard seltzer a “beer?” (STZ)
A Manhattan federal judge did not dismiss Anheuser-Busch InBev’s lawsuit against Constellation Brands seeking to stop a Corona hard seltzer. U.S. District Judge Lewis Kaplan said Constellation Brands had not clearly proven that it was entitled to sell hard seltzer under the licensing agreement. The judge said it would take discovery and possibly a trial to determine whether the language in the contract allows the sale of hard seltzer. The contract did not explicitly include hard seltzer when it was written in 2013 because the product category was not considered. However, the contract does include beer, malt beverages, and “any other versions,” which is behind Constellation Brands’ confidence that it will win the lawsuit. Attorneys estimate the trial could begin early next year.
Last week Oregon passed a law that considers hard seltzers a malt beverage and taxes it accordingly. Under Alcohol and Tobacco Tax and Trade Bureau regulations, both malt and sugar-based hard seltzers are considered “beer.” Constellation Brands is confident in its case, but there is a concern the lawsuit will have management take their foot off the gas pedal for hard seltzer while it is being litigated.
