October food CPI accelerates (K.R.)
CPI for food at home increased 5.4% YOY in October, accelerating from 4.5% in September. Both the food and food and beverages category saw similar increases in CPI at 5.3% YOY and 5.1%, respectively. However, the meats, poultry, fish, and eggs category had the highest level of inflation at 11.9%, accelerating from 10.5% in September.
Margin headwinds were not a surprise (STKL)
SunOpta reported Q3 EPS of $.01, in line with consensus expectations. Overall revenue growth of 3.6% was driven by 16% growth in plant-based while fruit-based decreased 9.7%. The quarter's highlight was the tripling of oat milk revenue, outpacing the category's impressive growth of 65% during the quarter. Supply chain challenges were the story of the quarter. Management believes that revenue growth could have been 5% higher with additional raw materials.
There was gross margin pressure of 220bps in the quarter, a negative surprise after 40bps of expansion in Q2. Additional depreciation from the new plant was a more significant contributor than raw materials or transportation. The largest headwind for margins were supply chain disruptions that led to lower plant utilization and higher unit costs. The company had avoided significant disruptions until midway through Q3. The situation has improved so far in Q4. Fruit-based margin headwinds are due to a lag in pricing, which will be passed through in Q4.
Shares fell 13% after the earnings report, despite weak performance into the in-line results. The top line prospects continue to shine in plant-based with reason to expect improvement from the fruit-based business shortly. The supply chain challenges and inflationary pressures have been seen throughout the consumer sector. We continue to believe the company is positioned to pass through the inflationary pressures while expecting supply chain challenges to improve. Margin pressures will lessen sequentially, providing further visibility into our outlook for 2022. The future growth prospects for plant-based and fruit-based have likely never looked this attractive. SunOpta is a best idea long.
Utz Brands' Q3 provides relief (UTZ)
Utz Brands reported Q3 EPS of $.18 vs. consensus expectations of $.15. Revenue and EBITDA also exceeded consensus expectations. Total revenue grew 26.1%, boosted by acquisitions. Organic sales growth was 1%, lapping a 10% increase in the prior year. The salty snack category grew 7.9% during the quarter while Utz grew 4.4%, Utz's power brands grew 5.7%, and foundation brands decreased 4.2%. Utz underperformed the growth in its core market by 5.5% points, 2.8% in its expansion markets, and was even in emerging markets. However, on a two-year basis, power brands, emerging and expansion geographies all exceeded the salty snack category. Growth in the mass and C-store channel also exceed salty snack market growth.
Gross margins contracted 420bps due to rising inflationary pressure. About 100bps of pressure was due to I.O. conversions that reduced SG&A expense by a similar amount. As a result, adjusted EBITDA margins contracted 110bps. Inflationary pressures were a 650bps headwind offset partially by a 3.6% point contribution from price/mix.
Management reaffirmed EPS guidance of $.55-.60 for the year, with consensus at $.58. Management expects EBITDA to be at the low end of its $160-170M range, consensus at $162M. Commodity inflation is expected to be 7%, up from 6% last quarter. Management cited rising supply chain costs, a lower tax rate, and lower interest expense. Investors' focus has shifted to 2022, with 2H price actions offsetting inflationary headwinds, leading to earlier reductions in 2021 projections. Management foresees high inflation and transportation challenges continuing into 2022. The company has several tools to offset the inflationary headwinds, although there is a lag. The magnitude and the accelerating rate of inflation to low double digits have been a perfect storm. At the same time, top-line trends have been robust, the acquisition pipeline/synergies have been complementary, and geographic/channel growth has been well above the long-term growth formula.
AppHarvest beats a low bar (APPH)
AppHarvest reported a Q3 loss of $.17, better than consensus expectations of -$.31. Revenue of $.5M from 1.5 million pounds of tomatoes sold was also above consensus expectations of $.4M. Price per pound was similar to Q2.
Management said the second growing season is off to a solid start and tomato prices appear to be on the rise. The company is currently constructing three additional indoor farms that are expected to be completed by the end of 2022. Construction on a fourth farm has been paused with a target of 2023 completion. Management reaffirmed the outlook for the year of sales between $7-9M and an EBITDA loss of $70-75M. The company ended the quarter with $222M of cash after securing a $25M line of credit.
Congratulating half a million dollars in revenue and saying it exceeded expectations could be a new low for equity research. Q3 results were essentially a throw-away quarter with the replanting. There is very little to project future viability from such a small harvest. The company has continued to exceed our expectations for capital raises and borrowings. Management has an aggressive expansion plan despite missing all their initial plans to date. Delaying the construction of additional plants would appear prudent, but the company's backers have supported the development plans.
Koninklijke Ahold Delhaize Q3 (AD.AMS)
US SSS ex-fuel increased 2.9% with a 0.8% calendar headwind, lapping 12.4% in the prior year. Food Lion is the company's fastest-growing U.S. brand which has had 36 consecutive quarters of positive SSS. U.S. online sales grew 53%. Operating margins in the U.S. contracted 20bps. In Europe, SSS were flat with a 40bps headwind from floods in Belgium. Online sales in Europe grew by 20.1%. Operating margins in Europe were flat. Management raised expectations for operating margins for the year by 10bps to 4.4% due to performance year to date. Management said the supply chain was "pretty normal" in Europe, while it is "a little bit more challenged." Inflation in the Northeast was 3% in Q3 and expected to rise further in Q4. Management described the pricing environment as rational in the U.S. while the inflation rate is lower in Europe. The U.S. conventional grocers have been the biggest beneficiaries of the pandemic in food retail. They have also been able to pass on inflationary pressures with less competitive pressures from strained inventory levels.
Bell's Brewery acquired by Kirin
Kirin-owned Lion Little World Beverages has agreed to acquire Bell's Brewery. Bell's Brewery is the seventh-largest craft brewer by volume in 2020 with 500,000 barrels of capacity. Kirin acquired New Belgium in 2019, which is on pace to exceed one million barrels this year. Kirin now controls the fifth-largest craft brewery group after Anheuser-Busch, D.G. Yuengling, Molson Coors, and Boston Beer. Bell's and New Belgium would have a combined 1% share of the beer category. Larry Bell, the founder of Bell's, will retire. Year to date, New Belgium's off-premise sales are up 20%, while Bell's is down 4%. One of the biggest changes for Bell's maybe its future distribution as the company had avoided wholesalers aligned with Anheuser-Busch InBev, Molson Coors, and Reyes Beer Division. Due to the merger, Bell's will no longer be considered a craft brewer by the Brewers Association like Samuel Adams. Many craft breweries are founder-led and owned, making succession and monetization challenges. A sale and exit to larger beer companies have been the path for many.
