Sprouts Q3 results (SFM)
Sprouts Farmers Market reported Q3 EPS of $.56, beating consensus expectations of $.39. SSS declined 5.4% compared to expectations of -3.9%. Gross margins contracted 130bps due to the comparisons and passing through cost inflation to customers. Compared to Q3 2019, gross margins expanded 265bps from fewer promotions, shrink improvement, and mix. The company cited significant inflation in meat with resistance to the higher price points by customers. Produce inflation has been double digits, but the company has been able to pass it through. SG&A expenses decreased by $52M due to lower pandemic expenses, incentive compensation, and lower marketing and e-commerce costs. Compared to 2019, SG&A spend only up 4.7%.
Management guided Q4 EPS to $.26-.30 vs. consensus of $.34. SSS are expected to decline 3 to 5% compared to consensus expectations of -2.6%. Gross margins are expected to contract less than in Q3. Despite the weaker sales results, management is moving forwards on the plan to re-accelerate store growth. The company expects to open 65% of its 20-25 new stores in 2022 in Q4. Management is planning for comps to be flat in 2022 as well as EBIT. Management believes the margins are where they need to be, so the focus will be on growing the top line. The plan is for gross margins to be flat in 2022.
Sprouts is pushing ahead with a new strategy and new store format to accelerate store growth, but growing traffic is still a top concern. In addition, the company over-earned during the pandemic – the margin gains will be competed away. As a result, Sprouts Farmers Market is on our shortlist.
Nomad Foods Q3 results (NOMD)
Nomad Foods reported EPS of €.35 vs. consensus of €.31. Revenue grew 4% YOY. Organic revenue decreased 1.4% with volume/mix down 1% while price declined 0.4%. Acquisitions added 3.3% to overall growth, while translational Fx added 2.1% to growth. Gross margins contracted 240bps due to higher raw material costs (200bps) and the acquisition of Findus (40bps), which has lower gross margins seasonally in Q4. Operating expenses decreased 14%. Adjusted EBITDA of €113M was above consensus expectations of €104M. Management reaffirmed EPS guidance of €1.50-1.55 for the year, representing 11-15% growth.
Management is seeing consumers in Europe return to work, leading to an LSD% headwind for the frozen food category. At the same time, management continues to create value by finding accretive acquisitions. As a result, Findus is currently tracking ahead of initial expectations. Management expects inflationary headwinds to pick up next year (Europe’s inflationary pressures have lagged the U.S.), but the company has been preparing several levers to mitigate the headwinds. Nomad Foods is on our long list.
Kellogg Q3 results (K)
Kellogg reported Q3 EPS of $1.07 vs. a consensus of $1.09. Organic sales growth was 5.1%, with volume growth of 1.4% and price of 3.7%. Gross margins contracted 280bps due to higher input, freight, and packaging costs. SG&A expenses decreased 9% YOY due to unusual comparisons in the prior year. By region, growth was driven internationally with sequential acceleration in Europe and AMEA. In Salty Snacks, Pringles accelerated sequentially in the U.S. and the majority of international markets. Morningstar Farms decelerated sequentially and underperformed the category.
Management reaffirmed operating profit and EPS guidance for the year. Organic sales growth is now expected to be 2-3% up from flat to up 1% previously. The company continues to see the gradual recovery for away-from-home sales in its categories, as seen in its slide:
Kellogg’s and the Bakery, Confectionery, Tobacco Workers, and Grain Millers International Union resumed talks on Tuesday and Wednesday. The talks were the first since the strike started. The union’s 1,400 cereal workers have been on strike since early October. The issues at stake are an assortment of pay and benefits agreements. Kellogg’s has brought in replacement workers to resume production at all of its cereal plants. Out of stocks in the cereal aisle have been documented across the country. Kellogg’s has been publicly stating its hope that an agreement can be reached. Unofficially the union has said there had been little change, but management appears to have been well prepared and has protected the financials from any meaningful impact. Kellogg is on our shortlist.
