CAN’T WAIT FOR THE 2H (PRGO)
Perrigo reported Q4 EPS of $.60 vs. consensus of $.56. EPS for the year was $2.06, down 12% YOY. Q4 sales were up 4.9% and organic sales growth was 5.5%. CSCA sales grew 5% due to the return of the cough/cold season. CSCA gross margins contracted 550bps. CSCI sales increased 4.6% with organic growth of 6.4%. Gross profit growth of 4% trailed segment sales growth slightly, improving from the 280bps YOY decline last quarter. CSCI operating margins expanded 670bps due to a planned reduction in advertising and promotions. Overall gross margins contracted 390bps, improving sequentially from 480bps of YOY contraction. Driving gross margins was a -250bps impact from lower operating efficiencies and -100bps impact from the dilutive impact of the divested generics business. Operating margins expanded 80bps to 11.9% due to lower operating expenses.
2022 guidance sets a low bar if the 1H gross margin pressures are fully reflected. Management guided 2022 EPS to $2.10-2.30 vs. consensus of $2.56. The guidance does not include an expected $.30 contribution to the 2H from the acquisition of HRA Pharma. The underlying organic sales growth is expected to be 7-8%. Management expects the 1H EPS range to be between $.84-.92 and the 2H to be between $.92-1.38 or $1.22-1.68 with HRA Pharma. Gross margins are expected to be flattish in 2022 with expansion in the 2H offsetting contraction in the 1H, but excluding the accretive impact from HRA Pharma. HRA Pharma is not overly seasonal, so a $.30 contribution in the 2H seems low even considering the potential impact from Ukraine.
We are moving Perrigo higher on our position monitor following Q4 results. 2022 guidance reflects the current gross margin pressures while including a smaller contribution than we expected from HRA Pharma. That should set the company for achievable results in the 1H and beats & raises in the 2H. For our recent Black Book presentation on Perrigo CLICK HERE. Our updated position monitor:
A better year in 2022 (GO)
Grocery Outlet reported Q4 EPS of $.20, in line with consensus expectations. SSS decreased 1.2% due to a traffic decline vs. consensus expectations of -2.6% and guidance of -3.5% to -2.5%. Traffic was flat in October before the Omicron variant. Traffic has since returned to positive in Q1. The company has several initiatives for 2022. Instacart will be rolled out to all stores in the coming months. A new loyalty app will be launched this year. Grocery Outlet is also adding more everyday SKUs, increasing the mix of products that are always in stock compared to opportunistic buys. Gross margins expanded 60bps inflecting from 40bps of contraction sequentially, leveraging its purchasing model. SG&A grew 1.5% due to higher occupancy and IO expense offset by the cancellation of a conference and lower incentive compensation. Stock-based compensation was $7.6M vs. $3.8M last year.
Management is guiding Q1 SSS to increase 3%. For the year management expects SSS to increase 4-5%, driving EPS of $.92-.97. Gross margins are expected to be in line with historical averages at 30.6% while SG&A is expected to modestly leverage. Store growth will be a net of 28 in 2022 (6.7% growth) down from 35 in 2021, hampered by labor and material shortages. Elements of guidance including flattish gross margin outlook, store growth below 10%, and lower EPS expected in Q1 are modestly disappointing, but not surprising in the current environment. The removal of most pandemic restrictions in California, growth in customer traffic, fewer government transfer payments in 2022, and high levels of inflationary pressure should lead to a favorable environment for Grocery Outlet.
Beer wholesalers index signals trouble ahead (BUD)
The National Beer Wholesalers Association’s (NBWA) Beer Purchasers’ Index (BPI) for February had a reading of 43 down from 46 in January. The BPI is a diffusion index with a reading above 50 indicating expansion and below 50 indicating contraction. The National Beer Wholesalers Association represents 3,000 independent beer distributors in the U.S. January’s reading was contractionary for the first time since April 2020, but it reflected forward buying by distributors ahead of price increases. February’s reading was one of the weakest months in the past eight years.
The reading for FMB/hard seltzer was 34, down from 95 last February and 39 in January. Imports was one of the few sub-categories to be growing at 69, down slightly from 71 in January. Craft beer rose to 51 from 40 in January. Premium lights had a reading of 46, flat from January. Premium regular was 32 improving from 30 sequentially. Below premium beers were at 30 falling from 38 sequentially. The “at-risk” inventory reading was 64 in February compared to 58 in January after being below 50 in December, indicating the oversupply situation is worsening. At-risk inventory was below 50 all during 2021 and nearly the entirety of the pandemic. Price increases are more difficult to pass on when inventory levels are high and production will have to be scaled back.
UK grocery sales decline (NOMD)
Kantar Worldpanel’s U.K. grocery report showed that take-home grocery sales fell 3.7% YOY for the 12 weeks ended February 20, similar to the 3.8% decline for the 12 weeks ended January 23. Compared to the same period in 2020 sales were 8.4% higher. The decline in grocery spend comes as more meals are consumed away from home. The sales data shows grocery price inflation of 4.3% in February, accelerating from 3.8% in January in the U.K. February had the fastest rate of inflation since September 2013 excluding the start of the pandemic. Households spent £26.07 or 6.7% less on average at supermarkets in February. Private label and store brands outperformed national brands for the first time in three months. The U.K. is Nomad Foods’ largest market at 26% of sales.
