Black Rifle Coffee Company (SBEA)
We are hosting a Black Book pre-IPO review of Black Rifle Company today at 12:30 PM ET. The investment themes for our call are as follows:
Union agreement reached (K)
Kellogg and the Union for its cereal workers in the U.S. reached a tentative agreement after an eight-week strike. The agreement provides a 3% wage increase followed by COLA adjustments in the following years. A larger contention was the two-tier compensation for legacy and new employees. The agreement provides for non-legacy employees with more than four years of employment becoming legacy as well as a system to graduate more new employees in the future. The Union appears to have received much of what they wanted except the timing for the two-tier system is a slower progression than they asked for. The Union President did not praise the terms of the agreement in a way that makes approval by the members a foregone conclusion. One of the issues that received a lot of attention was the forced overtime which was not addressed in the union announcement. We have probably entered a new round of labor strength given the strikes at Nabisco and John Deere recently, which is not a surprise given the tightness of the labor market.
Constellation Brands gaining share in both channels (STZ)
On-premise beer category volume remains below pre-pandemic levels. Fewer on-premise locations, pandemic restrictions, and labor shortages all play a part. In 2021, premium light beers continue to lose share to imports, FMB/Seltzers, and recently craft beer. Boston Beer has gained share in the off-premise channel this year led by hard seltzer while Constellation Brands has gained share on and off-premise. Molson Coors and Anheuser Busch InBev have been the share losers this year despite some recovery in the on-premise channel.
Q3 beat, not a surprise (KR)
Kroger reported FQ3 EPS of $.78 vs. consensus of $.67. ID sales ex-fuel increased 3.1%, exceeding consensus expectations of 0.7%. Despite the acceleration in sales from -0.6% sequentially, Kroger lagged Walmart's grocery sales by ~7% points. FIFO Gross margins contracted 41bps. Higher supply chain costs and price investments are partially offset by sourcing benefits. The LIFO charge of $93M was $70M higher than the prior year and a seven cents headwind. Management noted that organized crime has had an impact on shrink.
OG&A leveraged by 49bps. The alternative profit business was said to be tracking at the high end of the $100 to $150M range of incremental profit in 2021. On a two-year stack ID sales were up 14%. Compared to Q3 of 2019 gross margins contracted 43bps while OG&A leveraged by 79bps. Management raised EPS guidance for the year to $3.40-3.50 from $3.25-3.35 previously. ID sales ex-fuel are now expected to be -0.4 to -0.2% up from -1.5% to-1%. The company also announced it would host a business update meeting on March 4th at its customer fulfillment center in Florida.
While ID sales and EPS results were above consensus expectations, they should have been foreseen given the numerous competitive sales data points in the quarter. Nothing in the quarter’s results change our opinion of the company’s earnings power when the pandemic’s impact on food at home spending fades. The difference in the public and governments’ reaction to the omicron variant compared to the delta variant should provide visibility in the fading impact of the pandemic.
