Restaurants
A spokesperson for OpenNode said that the company is "currently onboarding multiple multi-billion dollar businesses based in El Salvador," as OpenNode also provides services to BigCommerce (BIGC) and Substack, among other companies, for a 1% fee. MCD is using OpenNode and now so are others. Additionally, Starbucks and Pizza Hut are both accepting Bitcoin payments in El Salvador, according to the country's Twitter pages. Businesses are required to accept digital currency but can be exempted if they lack the necessary technological requirements. It remains to be seen if the moves will transfer to the United States, as analysts think Panama and other South American countries could follow El Salvador's lead.
Consumer Staples
KR Q2 results, raised guidance still implies a 2-year deceleration
Kroger reported FQ2 EPS of $.80, above consensus expectations of $.64. ID sales excluding fuel decreased 0.6%, above consensus expectations of -3.2%. ID sales accelerated from the 4.1% decline in FQ1. ID sales turned positive in July as the Delta variant became more prevalent.
Gross margins ex-fuel contracted 60bps primarily due to price investments, higher shrink, and supply chain costs partially offset by sourcing benefits and alternative profits growth. 25-50% of the shrink was attributed to organized crime. Kroger recorded a $47M LIFO charge in the quarter compared to a $23M charge in the prior year, reflecting raised inflation expectations. The two-year ID sales stack was 14%, but gross margins contracted 55bps compared to 2019. Compared to 2019, OG&A costs were 137bps lower. OG&A was 130bps lower YOY reflecting lower pandemic costs and cost savings initiatives. FIFO operating margins expanded 30bps YOY. Fuel gallons grew 7% with a fuel margin of $.39 per gallon, up to two cents YOY. Fuel was a $33M tailwind to operating profit. Management described the vaccine administration as neutral to profits, while Albertsons said it was the largest tailwind to gross margins in the most recent quarter.
Management raised EPS guidance from $2.95-3.10 to $3.25-3.35. Guidance for ID sales was raised from -4% to -2.5% to -1.5% to -1.0%, with the 2H expected to be flat to slightly positive. That implies a ~300bps deceleration in the 2H on a two-year stack basis. Management now assumes inflation to be 2-3% in the 2H. As they return to the office has been postponed, and indoor masking rules have been reinstalled in certain areas, food at home has benefited. A long investment in the grocers is also a bet on life not resuming to pre-pandemic behavior.
Craft beer recovery (SAM)
The Brewers Association estimates that craft beer volume could grow 7 to 8% in 2021. That comes against a 9% volume decline comparison in 2020. Pre-pandemic draft beer accounted for 10-12% of industry volume. It fell all the way to 2% during the pandemic before bouncing back to 8% currently. Not fully recovering to pre-pandemic levels may be behind the craft beer industry’s reluctance to raise prices. The craft beer average price increase has been 2.4% in 2021, lagging behind overall food and beverage price increases despite a series of supply chain challenges. These challenges include shortages of aluminum cans, bottles, cardboard, pallets, employees, drivers, and CO2.
Beer distributor acquisition (STZ)
Reyes Beer Division announced an agreement to acquire a large share of Classic Beverage’s beer portfolio in Southern California. Reyes Beer Division is the largest beer wholesaler in the U.S. at 41 million cases. Reyes will add 6.8 million cases and 6,000 customers from Classic Beverage. Classic Beverage carries Molson Coors, Mark Anthony, Boston Beer, and Heineken, among other craft beer brands. Classic will, in turn, get the brand rights to Coronado Brewing, Gambrinus, and Rogue Brewing from Reyes. There have been many discussions recently that the Biden administration’s executive order to address overconcentration in the economy will take a hard look at beer distributors. The Treasury Department was asked, along with the FTC and Justice Department, to submit a joint report on “patterns of consolidation in production, distribution of retail beer wine, and spirits markets.” Reyes Beer Division’s largest market in California, so it should be an early test of the executive order’s impact.
Constellation Brands forced the sale of rights to distribute its brands in many California markets to Reyes in the last few years. Reyes has been a strong partner to Constellation Brands as well.
