We consolidate our three-morning notes across the Restaurants, Consumer Staples, and Cannabis verticals into one morning note.
Restaurants
Small food & drink sales decelerate.
Food and drink sales decreased 8.3% week over week in the week ended August 22. It was the second straight week of declines, according to CardFlight’s small business report. The following chart shows the change in sales and transaction counts at small U.S. businesses in the Food & Drink category from the pre-COVID 19 baseline week of March 2-8. CardFlight’s average active merchant processes roughly $130,000 in card payments annually.
According to the National Restaurant Association’s online survey, six in ten adults changed their restaurant usage due to the delta variant. For example, 9% said they canceled existing plans to go out to a restaurant in recent weeks, while 19% said they completely stopped going out to restaurants. 37% said they ordered takeout or delivery instead of going to a restaurant, while 19% said they chose to sit outside instead of inside. 41% said they didn’t take any action in recent weeks. 32% said they would be less likely to out to a restaurant if there was an indoor mask requirement. 32% also said they would be less likely to go out to a restaurant if there was a vaccination requirement.
Consumer Staples
Foodservice slows sequentially (BUD)
Technomic’s Tindex, a foodservice monthly index, reported a 0.7% decline in July from June. However, the foodservice industry was still 1.1% higher than July 2019 and up 31% compared to July 2020. Technomic attributed the slowing to “Softening in some noncommercial segments is the reason for the drop in the index, but restaurant sales remain strong.” Technomic’s Tindex is unique in that it utilizes several data sets, including foodservice transactions, consumer visits, and distributor sales.
Inflation headwinds (SJM)
J.M. Smucker reported FQ1 EPS of $1.90, down 20% YOY, but a penny above consensus expectations. Sales decreased 6%, but in constant currencies excluding divestitures, sales increased 1%. Sales were 3% above consensus, led by the Consumer Foods and Coffee segments. Management lowered EPS guidance for the year by about 5%, from $8.70-9.10 to $8.25-8.65. Pricing actions are expected to lag cost inflation, so management expects FQ2 to decline 15% and FQ3 EPS to be down YOY. Management attributed the weaker outlook to lower sales and gross margin. COGS inflation is expected to be HSD%. Comparable sales are expected to grow 2.5% at the mid-point, reflecting a deceleration in at-home consumption trends. Gross margins are expected to be ~36%, 100bps lower than previously expected and 300bps lower YOY.
The F22 outlook disappointed investors with a higher inflationary outlook than the previous quarter when management indicated inflation could be handled and guided above consensus expectations. Now management guided below where consensus was a quarter ago. J.M. Smucker is on our shortlist as we are lower than management’s expectations for the ability to pass on price increases with so much of the portfolio in weaker/promotional brands. The company disproportionately benefited from the shift to at-home meal consumption will is reversing while competition in CPG is accelerating with inflationary driven price increases.
(For additional details, please see our separate note.)
Higher poultry prices (SAFM)
Sanderson Farms produced 4.2% fewer pounds of poultry than full production in FQ3. Sanderson Farms said the average quoted market price for boneless breast meat was 71.4% higher in the quarter than a year ago. The average market price for bulk leg quarter increased by 66.3%, the average market price for chicken breast tenders increased by 107.3%, and the average for jumbo wings was 107% higher. In comparison, the average feed costs per pound of poultry processed increased by 45.8% YOY. The USDA expects broiler production for 2021 to increase by 1%, but Sanderson Farms expects its own production to be down 3.1% in the next quarter, bringing the year down 0.6%.
Cannabis
TLRY's $4 Billion Master Plan
TLRY CEO has come out with an aggressive, border lining on an absurd statement that their revenue will increase 700% (yes, you read that right) in the next 3 years. TLRY’s CEO, Irwin Simon, promised this to the public during their most recent earnings call, claiming that their current $635 million in sales for 2021 will jump to $4 billion by 2024. His fragile plan to achieve this was laid on the hope that shareholders would bite and want to approve the issuance of additional shares to pursue their M&A strategy to enter the US market. In the letter where he laid out this plan, Irwin states: “Proposal 1, in particular, would authorize Tilray to issue additional shares to execute on attractive acquisitions and other growth avenues in our M&A program. We need a majority of all the shares issued and outstanding to vote in favor of Proposal 1 for it to pass. We have approximately 49% of our stock voting in favor – but that is not enough! We need to hit 50.1%. There are no shortcuts.” In addition, another quote stated: “MedMen is a premier American cannabis retailer and one of the most recognized brands in the $80 billion U.S. cannabis market”. As TLRY likes to do, let’s aggressively assume that the US will have $25 billion in cannabis sales by the close of 2021, based on Hedgeye’s estimates. The notion that there is a possibility for a 21’ $80 billion market legal market even with legalization is a gross overestimate that is extremely dishonest and misleading to TLRY’s investors. Even if legislation is passed, there will still be an active illicit market similar to Canada, which will take up a significant portion of overall cannabis sales. In addition to this, the letter assumes much of TLRY’s revenue depending upon expansion into US territories, when the reality is full legalization is still very much up in the air. Speaking on the company’s international plans, the window of opportunity in just a select few countries seems grim, as only a few offer legalization, and there is much unknown. Tilray has a very long way to go to hit that $4 billion mark, and if one day they do, it will come from expensive acquisitions rather than from organic growth.
MA Tracker
Massachusetts continues its strong sales with $29 Million in cannabis revenues this past week. This is the same amount as the past two weeks. However, compared to the year prior, this number is a 61% increase. The annual run rate based on the past 12 weeks of sales data is $1.43 Billion.
