Consumer Staples
PEP’s Q3 confidence (UTZ)
PepsiCo reported Q3 EPS of $1.79, $.06 above consensus expectations. Overall organic growth was 9% YOY, decelerating from 12.8% in Q2. Growth was comprised of 4% volume growth and 5% from price/mix. Frito Lay had 5% organic growth in North America with volume growth of 1%, decelerating slightly from 6% in Q2 with the same volume growth. On a two-year basis, growth was 12%. Ruffles grew double digits, Doritos grew MSD%, and Cheetos grew LSD%. In addition, the smaller, better-for-you brands PopCorners and Bare grew “strong” double digits. Management expects Frito Lay’s operating profit to improve in Q4 due to specific supply chain pressures easing and price increases are implemented to offset higher commodity, transportation, and other supply chain costs.
Management revised their EPS guidance from 12% growth to at least 12% growth. In addition, organic revenue growth guidance was raised to a very robust 8% from 6%. Management would not get into specific guidance for 2022, but their tone showed confidence in the next year with the current momentum in the business. “But I think we can say with confidence that we expect both revenue and core constant currency EPS to be in line with the long-term objectives for ’22. So hopefully, that gives everyone some level of comfort as we emerge from Q4. We emerge with a lot of momentum in the top line as well as a business that has got its supply chain well managed and on good footing to deliver another good year next year.”
Frito Lay’s hedges have recently rolled off, which allowed the company to delay price increases. Management expects to be able to pass on inflationary pressure with price increases that have been implemented in the snack business in the last three weeks. Management said price elasticity is lower than what they had seen historically. With Frito Lay (the category leader in salty snacks) now more aggressively raising prices, other companies, including Utz, will implement their price increases. UTZ is along on the Consumer Staples position monitor.
Salty snacks in C-stores (UTZ)
According to the National Association of Convenience Stores (NACS) state of the industry report, sales of Frito-Lay legacy brands have seen substantial growth over the past several months, with Lay’s up 32% and Tostitos up 42%. Salty snacks have been trendy during the pandemic. Mintel found that most salty snack consumers eat three to four types of snacks in the salty category (potato chips, pretzels, popcorn, tortilla chips, pork rinds, etc.) while one in five eats at least five different types. The introduction of new flavors like ghost pepper, Korean barbecue, wasabi, sriracha, and habanero has seen many trials. During the pandemic private label, salty snack sales declined, demonstrating the consumers’ affinity towards brands they know. Utz has seen strength in the C-store channel and its new product innovation during the pandemic. We recently published a Black Book on Utz.
Cereal strike (K)
All of the production at Kellogg’s cereal plants in the U.S. stopped on Tuesday when 1,400 workers went on strike. The strike included plants in Omaha, Nebraska, Battle Creek, Michigan, Lancaster, Pennsylvania, and Memphis, Tennessee. The union and management have been negotiating for over a year over pay and benefits issues. The company said its offer would increase wages and benefits for its employees that made an average of $120,000 last year. The union said workers were working 12-hour shifts seven days a week for much of the pandemic. The union says the company wants to eliminate the cost of living adjustments and the cap on the number of lower-wage workers hired. Newer workers are paid about $11 an hour less than veteran employees. About a third of Kellogg’s sales are from cereal. The labor shortage is even impacting jobs with high wages. Two weeks ago, a strike by the same union at a Nabisco plant ended after five weeks. It would seem more strikes should be expected.
