Raising the bar again (STZ)
Constellation Brands reported FQ3 EPS of $3.42 excluding Canopy and $3.12 including Canopy, exceeding consensus expectations.
Beer division sales grew 4% lapping difficult comparisons. Beer depletion growth was 8.4% compared against 12% growth last year while shipments increased 3.1%. Modelo Especial depletion growth was 13% during the quarter while Corona Extra depletion was 11%. On-premise was only 8% of volumes compared to 15% pre-pandemic. December depletions accelerated from FQ3, providing visibility for Q4 projections. Beer operating margins contracted 130bps with COGS headwinds from higher commodity costs, brewery costs, and incremental depreciation from the Obregon expansion. Shipments are expected to exceed depletions with distributors building inventory. The new manufacturing expansion is projected to require capex of $5-5.5B, the majority of which is expected to be incurred in the next three years.
The company also announced an agreement with Coca-Cola to produce and distribute a Fresca RTD. Management said that half of Fresca’s customers use it as a mixer. Fresca is at about 0.25% of U.S. soda volumes, but a recognized brand with Constellation Brand’s marketing and distribution should encourage trial.
Wine and Spirits organic net sales increased 3% driven by shipment growth of 2.5%. Depletions declined 6.8% while organic shipment growth was 1.4%. The segment’s operating margins expanded 140bps driven by better leverage, mix benefit from divestitures of lower-margin businesses, and price increases were partially offset by higher marketing and SG&A.
Management raised guidance to $10.50-10.65 from $10.15-10.45 reflecting an improvement in beer profits and a lower tax rate. Management raised their guidance for the beer division to 10-11% sales growth and 6-7% operating profit growth up from 9-11% and 4-6% previously. Management raised their guidance for the wine division to organic growth of 4-6% sales growth and 2-4% operating profit growth from 2-4% sales growth. The drivers behind higher sales growth for beer are largely one-time in nature including smoke-tainted bulk wine sales (the disclosure was disappointing during the call). Shipments are expected to decelerate in Q4 as distributor inventory levels will be right sized. The tax rate was 14% vs. 17.7% last year due to the timing of stock-based compensation. The tax rate for the year is now expected to be 50bps lower.
Constellation Brands is a best idea long. The company’s beer brands continue to be THE growth story in beer. Supply has held results back yet again, but the new capacity expansion plans have been reset. Management’s comments regarding margins have frequently kept investors’ expectations in check, especially when shares are at new highs and new capacity investment plans are ramping up. Sales expectations have been better correlated with share performance, particularly during capacity expansion periods.
Conagra misses while inflation accelerates (CAG)
Conagra reported Q2 EPS of $.64 vs. consensus of $.68. Organic net sales grew 2.6%, 1.1% above consensus expectations, and accelerated from -0.4% sequentially. Total volumes declined 4.2% while price/mix increased 6.8%. Conagra’s retail sales were up 14.8% on a two-year basis, led by snacks up 21.6%, frozen up 13.7%, and Staples up 12.3%.
By segment:
- Grocery & Snacks organic sales decreased 0.6% with volumes down 5.3% and price/mix up 4.7%.
- Refrigerated & Frozen organic sales grew 3.9% with volumes down 4.7% and price/mix up 8.6%.
- International organic sales grew 2.1% with volumes down 5.8% and price/mix up 7.9%.
- Foodservice organic sales grew 15.2% with volumes up 9.1% and price/mix up 6.1%.
Gross margins contracted 480bps, slightly less than the 530bps of contraction in FQ1, and were 110bps lower than consensus expectations. The inflation headwind was 1,100 bps with gross inflation of 16.4% of COGS. Management’s inflation expectations for the year have increased from 11% at the time of the last call to 14% currently. Conagra is implementing another round of price increases on top of what the company took in FQ2 as seen in the following chart. The most significant impact will be in FQ4. Total price per unit accelerated from +3.7% in the 12 weeks ended June 13th to +4.3% for the 12 weeks ended September 5 and +5.4% for the 12 weeks ended November 28.
Operating margins contracted 500bps and were 130bps below consensus expectations. Inflationary pressures were higher than expected, supply chain challenges, and an emphasis on meeting demand were greater pressures on gross margins.
Management believes additional cost savings and pricing actions will maintain their previous guidance for EPS to be $2.50. The magnitude of the needed price increases in competitive categories to offset the accelerating, double-digit inflationary pressures keep Conagra on our short list. Price increases do not happen in a vacuum and consumers have headwinds from inflationary pressures in categories outside of food. At the same time, the consumer will be lapping child tax payments and fewer receiving SNAP benefits. We differ from management’s thinking on the topic, which we are happy to discuss.
MEAT SNACKS (SNAX)
The secularly growing snack category is one of our favorite sectors of food. Meat snacks are well-positioned to capture the growing interest in high protein diets. According to IRI meat snacks grew 21.8% in the year ended November 28 to reach $4.5B in the U.S. with volume growth of 15.8%. Compared to 2019 meat snacks have grown 33%. Jerky sales represented $2.2B of the meat snack category with growth of 23.3% and volume growth of 17.9%. All other dried meat snacks including Biltong represented $2.3B of sales for the year with volume growth of 14.5%. Convenience stores are the leading channel for meat snacks with $2.1B of sales compared to $773M in the grocery/food channel and $117M in the drugstore channel. Meat snack sales in the convenience store channel grew 21.9% in the year ended November 28 and 29.1% compared to 2019. Stryve Foods makes biltong, a no-sugar, air-dried meat snack without preservatives. The company went public last year and is presenting at next week’s ICR conference. Stryve Foods was one of the two dozen companies in the Consumables sector that we previewed in our ICR Conference Guidebook. To download the Guidebook CLICK HERE.
