Consumer Staples Quad 4 Themes Call
On January 19 at 2:30 PM ET we will hold our Consumer Staples Theme Call. The Hedgeye Macro team is calling for Quad 4, the quad that Consumer Staples outperforms in. The headwinds appear to outnumber the tailwinds, margins are under pressure, and the top line looks more likely to disappoint. Despite those concerns, we are constructive on the sector. We will explain the repositioning of our investment longs and shorts.
We will also do a deep dive into our investment themes for the sector including:
- Inflation
- Price increases
- Wage pressure
- Plant-based food
- Media spend
- COVID-19 peak
- At-home food consumption peak
- Grocery e-commerce
- Government transfer payments
- Supply chain challenges
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Stay tuned for further details.
Monster enters alcohol (STZ)
Monster Energy announced an agreement to acquire CANarchy Craft Brewery Collective for $330M. CANarchy is the 20th largest beer vendor in the U.S. CANarchy’s beer and hard seltzer portfolio includes the brands Cigar City, Oskar Blues, Deep Ellum, Perrin Brewing, Squatters, and Wasatch. Monster Energy said, “The acquisition will provide us with a fully in-place infrastructure, including people, distribution, and licenses, along with alcoholic beverage deployment expertise and manufacturing capabilities in this industry.” CANarchy’s off-premise sales decreased 9.4% in 2021 to $115M. In production terms, the company produced 489,626 barrels of beer in 2020, up 2% from 2019.
A JV with Monster Energy was an upside call option for Constellation Brands. We think that is much less likely now as CANarchy has wide distribution among its many brands. At #20 CANarchy does not have the distribution that a large-scale Monster hard seltzer offering would require, so there will have to be new arrangements made in the future.
Truly remarkable, but not in a good way (SAM)
Boston Beer lowered EPS guidance for F2021 to -$1.00 to $1.00 vs. prior guidance of $2.00-6.00 and consensus of $5.69. Management now estimates that shipment growth and gross margins will be below guidance. Management expects lower shipments because distributors are more aggressively reducing the inventory of Truly than previously expected. For 2021 management projects depletions to increase between 21 and 22%, shipments will increase between 15 and 16%, price increases will be 2 to 3%, and gross margins will be between 38 and 40%. For 2022 management expects depletions and shipments will grow between MSD% and LDD%, price increases will be between 3 and 6%, and gross margins will be between 45 and 48%. The consensus EPS estimate peak for 2021 approached $25 in May, a truly remarkable revision. However, the announcement does not change our opinions much. The 2H of 2021 is an extraordinary event that obscures underlying demand. We have expressed our concern about inventory levels of hard seltzer for more than half the year. Yesterday's announcement was another extension of bringing supplies in line with demand. In our experience management teams frequently overestimate near-term demand while inventory levels are right-sized. We recognize how much the shares are down from the peak, but our concern for the guidance is for depletion and shipments to grow ~HSD%, with MSD% price increases, and the most difficult comparisons front-loaded.
