The unwind continues (ACI)
Albertsons reported FQ1 EPS of $.89, beating the consensus of $.71. ID sales decreased 10% YOY but grew 16.5% on a two-year basis. Digital sales were flat YOY but grew 276% on a two-year basis. Traffic was up, but basket size was down. Grocery sales trends are still elevated as the food away from home channel has not fully recovered. Inflation was ~1.6% in the quarter, and management now believes it will pick up further in the 2H. Last quarter management said their business plan was based on 1-2% inflation this year.
Gross margins contracted 70bps YOY. Excluding fuel, gross margins expanded 10bps from administering the COVID-19 vaccine, productivity initiatives, and private brands offset by sales deleverage. SG&A deleveraged by 50bps. Excluding fuel, SG&A deleveraged by 115bps. On a two-year basis, gross margins have expanded 90bps, and SG&A has leveraged 75bps.
Management raised EPS guidance to $2.20-2.30 from $1.95-2.05. Revenue is expected to decline 5-6% up from 6-7.5%, representing an 11-12% ID sales increase on a two-year basis. Adjusted EBITDA is now expected to be between $3.7-3.8B from $3.5-3.6%.
In the current quarter, management is seeing sales trends similar to the prior quarter. Food at home consumption remains elevated as most office workers continue to work from home, but the fall will bring a significant increase in in-person school attendance. In-person school attendance will free up more parents to return to the office. Q2 gross margins should reverse without the benefit of COVID-19 vaccinations. Gross margins face several headwinds as the food at home shift unwinds, inflationary trends pickup, and competitive pressures increase. Albertsons’ current profitability appears to be on borrowed time.
Owned brand volumes in secular decline (TAP)
Molson Coors reported Q2 EPS of $1.58, above the consensus of $1.34. Net sales grew 17.4% or 13.7% in constant currencies, accelerating from a 9.7% sales decrease (or 11.1% decrease in constant currencies) in Q1. Sales per hectoliter grew 5.0%, while underlying costs grew 8%. The pricing improvement came from a lower economy brand mix. Consolidated brand volumes increased 3.1% in Q2, accelerating from -9.1% in Q1, with North America down 1% and Europe up 15.4% (against lockdown comparisons).
North American sales growth of 10.1% was driven by volume growth of 1.9%, price/mix of 6.4%, and currency of 1.8%. That represents a significant acceleration from Q1’s 5.5% revenue decline due to the lapping of the pandemic. North America on-premise was 13% of sales vs. 16% in 2019. In the U.S., the on-premise channel was at 80% of pre-pandemic levels. North American brand volumes declined 1% in the quarter. In Canada, on-premise was at 25% of pre-pandemic levels, with the lockdown continuing longer than management expected. Underlying costs increased 8.5%, driven by inflationary pressure, and MG&A grew 24.2%, driven by delayed marketing expenses as the company resumed advertising. In Europe, sales grew 69.5% or 52.3% in constant currencies against the pandemic comparisons with volume growth of 17.8%, price/mix of 34.5%, and currency benefit of 17.2%. European brand volumes recovered by 15.4%.
Total EBITDA decreased 1.3% in constant currencies in Q2 and 7.6% in the year's first half. Underlying EBITDA in North America decreased 10.7% due to inflationary pressures, higher transportation costs, higher packaging costs, and higher marketing spend, offset by higher pricing. In Europe, underlying EBTIDA increased from $31M to $100M due to the recovery comparisons, favorable mix, price increases, partially offset by higher marketing spend.
Management reaffirmed guidance for the year for revenue to grow MSD% and underlying EBITDA to be flat. Marketing investments will ramp up in Q3. The company has also scaled its business to have less exposure in the economy brands. As a result, 70% of the volume loss was in the economy brands. Management maintained their goal of achieving 10% hard seltzer share by year-end. Q2 had several comparison benefits from the sharpest impact from the pandemic last year and the Texas winter storm and hacking in Q1. With the easiest comparisons behind it, there is a better sense for run rates and the secular challenges ahead, particularly in volumes with third-party brands substituting for its own. Molson Coors is on our short list.
Plant-based cheese (OTLY)
Nobell Foods, a plant-based cheese company, raised $75M in a Series B investment round. Andreessen Horowitz led the round, and Bill Gates backed Breakthrough Energy Ventures (also includes Jack Ma, Jeff Bezos, and George Soros) and Robert Downey Jr.’s Footprint Coalition Ventures. It brings the total amount raised to $100M. The company makes plant-based casein protein from bioengineered soybeans. Casein is the protein most closely associated with the stretch of cheese. Since casein is unique to dairy, Nobell is utilizing plants to grow the protein by genetically engineering the soybean to produce casein. As a result, Nobell will be able to grow more casein per acre more sustainably and efficiently than cows. The company is aiming for a late 2022 launch targeting the foodservice segment first.
Plant-based cheese alternatives have been a challenge for food scientists, so that plant-based casein may be the answer. However, many of the consumers of plant-based foods also avoid GMOs, so it is not clear how large the target market is.
