Back to growth mode (LW)
Lamb Weston reported FQ4 EPS of $.44 vs. consensus expectations of $.42 and -$.01 last year. The upside was from better sales and margins in the foodservice segment. Sales grew 19%, with volumes up 13% and price/mix up 6%. Excluding the extra week, sales grew 28%, with a volume growth of 21%. The Global segment (top 100 North American-based QSR and full-service chains) revenues grew 19%, with volume growth of 16%. The Foodservice segment (North American foodservice distributors and restaurant chains below the top 100) revenues increased 82%, with volumes up 64%. Shipments to non-commercial customers (lodging and hospitality, health care, schools, sports and entertainment, and the workplace) are at two-thirds of pre-pandemic levels. The Foodservice segment exited the quarter at 95% of pre-pandemic levels. Management noted that the attachment rate of fries to customers’ orders has increased, which has driven sales above traffic trends at restaurants. The Retail segment revenues decreased 28%, with volume down 30% as it lapped the stockpiling phase of the pandemic. Retail sales are still 25% above pre-pandemic levels.
Management said inflationary cost pressures would be a headwind in the 1H of the fiscal year before price increases are fully passed through over the next three to six months. Canola oil prices have doubled, and transportation costs are up significantly. Management did not provide specific earnings guidance citing the volatility of key input and transportation costs and the potato crop outlook. Management’s visibility is lacking in the near term on costs, but it continues to improve for revenue. The company has greenlit two large capital projects in Idaho and China, a new production line at an existing facility, and is undertaking a debottlenecking process to increase capacity by the equivalent of another production line.
We are moving Lamb Weston one spot higher on our Best Ideas Long list after the sell-off. Investors were disappointed by the lack of clarity on near-term cost pressures. In our view, the timing lag of price increases and productivity benefits to offset the higher near-term costs will be temporary. At the same time, the company’s growth outlook is better than it was before the pandemic. In comparison to the lack of clarity from a global pandemic, the near-term unknowns pale in comparison.
Return to the office (KR)
According to Kastle Systems, its 10 cities' average occupancy rate for office buildings reached 34.8% for the week ended July 21, up 30bps from 34.5% in the prior week. Kastle’s occupancy barometer reflects access swipes to the office; it provides control systems. Kastle has customers in more than 2,600 buildings in 138 cities. Of the ten largest cities Austin, Dallas, Chicago, and Washington D.C. had the largest improvement in the past week, as seen below. The smallest improvements in the past week were in Philadelphia, San Francisco, and Los Angeles. Office occupancy varies by region, with the largest Texas cities above 50% and the largest California cities below 30%.
The return to the office will determine how permanent the food consumption shift is from on-premise to off-premise. The CDC updated its mask guidelines yesterday to recommend that fully vaccinated people wear masks indoors when in areas with high or substantial transmission (about two-thirds of U.S. counties). Many companies have delayed plans to return to the office. Apple announced last week that it was delaying its planned September return to the office by at least a month. The return so far has been at a modest pace. The headwind for grocers is lessened currently, but it will stretch at least into late 2022.
Spirits and wine sales lead beer (ex-hard seltzer) vs. 2019 (VWE)
Sales of spirits decreased by 2.7% YOY for the two weeks ended July 10. The high end of spirits continues to drive growth, with the ultra-premium price tier up 12% YOY and up 94% compared to 2019. The high end of spirits has gained 1.8 share points compared to the prior year (the high end gained 4.3 share points YOY in 2020). RTDs grew 67% YOY and 428% compared to 2019. RTDs accounted for 5% of total spirits category sales over the two-week period and increased share by 200bps. The top five spirits RTD brands in the off-premise channel, according to Nielsen, were High Noon, Cutwater, On The Rocks, Monaco, and Crown Royal. Combined, the top five comprise nearly two-thirds of total spirits for the two-week period.
Wine sales decreased 6.1% YOY for the same period but increased 10% compared to the same weeks in 2019. Wine cocktails grew 40% YOY and 201% compared to 2019. Compared to 2019, domestic table wine grew 3.7%, outpacing imported table wine growth of 2.6%. California wines grew 4.2% in the off-premise channel compared to 2019. Hard seltzer grew 9% and 189% compared to 2019. Of the top ten hard seltzer brands over the two-week period, only four were in the top ten in 2019. Hard tea grew 7.2%, and kombucha grew 17.4%.
