Restaurants
USFD
Sachem Head discloses that it has acquired a 5.1% position in USFD. The firm has also purchased call options on 50,000 shares of common stock at an exercise price of $40 and expiring Dec 15, 2023, along with swaps betting on the positive performance of the stock. Activist fund Sachem Head said it intends to "engage in discussions" with U.S. Foods management about its business and future. Sachem Head previously disclosed a 2.5% stake in 2018 and claimed that the company was undervalued compared to its peers. Sachem believes U.S. Foods could boost its earnings by increasing pricing discipline and focusing on high-margin goods, actions undertaken at rival Sysco (SYY).
Consumer Staples
Position Monitor changes
We are making several changes to our position monitor. On the long side, we are removing Lamb Weston (L.W.). We are also moving Constellation Brands to #2 after its earnings report earlier this week. On the short side, we are moving Boston Beer (SAM) and Molson Coors (TAP) lower after the recent price weakness. Sprouts Farmers Market (SFM) is moved to #2
Potato blight (L.W.)
Lamb Weston reported Q1 EPS of $.20, down from $.61 in the prior year and a consensus of $.37, with the shortfall mostly from lower margins. Total sales grew 13%, with volume up 11% and price/mix up 2%. The Global segment was up 12%, with volume up 10% and price/mix up 2%. Restaurant traffic in the U.S. has stabilized at 5% less than pre-pandemic levels. International shipments approached pre-pandemic levels. Foodservice sales increased 36% with a price/mix of 1%, and volume increased by 35%. The recovery was led by schools, offsetting the softening in full-service restaurants in August. The Retail segment declined 14%, with volume down 15% and price/mix up 1%. Demand in the retail channel continues to be 15-20% higher than pre-pandemic levels.
Gross margins contracted 930bps with 75% of the inflationary pressure from commodity inputs and rising freight rates. Commodity inputs had DD% cost inflation driven by edible oils, wheat, containerboard. Other headwinds included higher labor costs from unplanned overtime and higher transportation costs. Lower production run rates also led to higher per-unit costs. SG&A increases reflect investment initiatives, higher compensation expense, and $3M of additional advertising.
Management changed their guidance from approaching pre-pandemic earnings in the second half of the year to continued pressure—the summer's heatwave in the Northwest negatively the quality of the potato crop. A month ago, we wrote about the lower yields expected from the potato harvest in Idaho and the Columbia Basin, but the crop appears even worse. As a result, gross margins are expected to be 500-800bps lower than historical levels due to the quality of the crop.
We are removing Lamb Weston from our long list. Investors have to wait for a more normal potato crop next year to regain lost margins. The potato crop is out of management's hands, especially considering the business is focused on a crop grown in a specific region. Management believes they will be able to pass on the inflationary pressures through price increases. We have lost confidence in its pricing power and have a less favorable view of its positioning among competitors and customers.
Wine valuations (VWE)
The Wall Street Journal reported that deals by private equity funds investing in wineries, vineyards, and distributors had grown 75% so far in 2021. M&A in the industry has also increased to $8.1B from $1.8B last year. The M&A includes the IPOs of Vintage Wine Estates and Duckhorn and the Altria sale of Chateau Ste. Michelle. In the Bordeaux region of France, valuations for high-end vineyards hit records this year. For example, Chateau Beausejour sold for $12.8M per hectare in April, 57% higher than a neighboring vineyard sold for in 2017.
