2022 forecasts that we can get behind (UTZ)
Utz Brands reported Q4 EPS of $.11 vs. consensus of $.15. Organic sales growth was 7.4%, comprised of 6% price/mix and 2.9% volume, accelerating from 1% sequentially. DSD conversions lowered organic growth by 1.5% points.
Gross margins contracted 240bps, inflecting from -420bps in Q3. 150bps of pressure came from IO conversions and the remainder came from higher input costs. Management’s previous outlook for input cost inflation was low double digits, but in order to keep up with demand input cost inflation was in the mid-teens%. SG&A leveraged 110bps from lower corporate costs, synergies, and IO conversions. Additive to EBITDA margins were +370bps from price/mix, +20bps from SG&A leverage, +60bps from acquisitions, +120bps from productivity initiatives, and +30bps from volume. Inflationary pressures were dilutive to margins including 680bps from higher costs like transportation, labor, and commodity costs. Excluding the 53rd week, last year EBITDA margins contracted 80bps.
Organic revenue was guided to 4-6%, above the long term formula of 3-4%. Utz Brands has taken up prices again in mid-February with further plans later in the year. During 2021 price/mix accelerated from 1.9% in Q1, to 2.3% in Q2, to 4.2% in Q3, and 6% in Q4. The guidance implies volume declines in 2022 which is appropriate despite the strong trends currently seen at retail in Q1 with pricing being raised through ticket and mix. Management guided 2022 EBITDA to $156M up modestly YOY vs. consensus of $167M. Management guided the 1H to represent 45% of EBITDA for the year, With EBITDA lower than planned the company’s leverage was 4.7x at the end of the year. Management’s plan to deleverage by growing EBITDA leads to leverage being elevated for the year ahead.
Margin pressures have stolen the focus from the elevated top-line prospects for the snacking category and Utz outperforming within the sector. Current trends at retail speak to the multi-pronged organic growth strategies that will remain in place as cost pressures subside. Transportation costs have been the largest, but not the only headwind for margins. Trucking costs have risen with an entangled and congested supply chain resulting from COVID disruptions in many forms. Our Industrials analyst, Jay Van Sciver, presented his short case on the truckers citing “decelerating economic growth, tighter policy, and inventory normalization adding pressure to rates.” The following chart from his presentation shows the historical relationship between truck pricing and industrial production. Contact sales for access to the presentation.
Peak Earnings (KR)
Kroger reported FQ4 EPS of $.91, above consensus expectations of $.74. ID sales ex-fuel increased 4.0% led by the fresh departments vs. consensus expectations of 2.1%. Gross margins expanded 3bps. Management said promotional activity is similar to pre-pandemic levels. The LIFO charge was $20M compared to an $84M credit last year, an $.11 headwind to EPS. OG&A deleveraged 7bps due to higher wages, lower COVID-19 costs, and sales leverage.
Management guided 2022 EPS to $3.75-3.85 vs. consensus of $3.43. ID sales are expected to increase 2-3%. The guidance includes cost savings of $1B, alternative profit growth similar to 2021, and an improvement in Kroger Health profitability. Management is essentially guiding to continued growth in EPS, but the pandemic receding will not be offset by food inflation.
The guidance does reflect lower SSS with a shift to away from home food consumption. With food inflation running up HSD% in the 1H of 2022, guidance implies a larger traffic/basket decline than recent return to the office trends indicate. Compared to pre-pandemic Q4 2019, ID sales were 14.6% higher, the gross margins were flat, the OG&A rate was flat, and EPS was 60% higher. The question is how much margins deleverage with a lower sales base. While sales to grocers increased during the pandemic the mass stores have gained share of the food basket both in-store and online. The share loss may prove to be more structural than the shift to food at home. At the same time there is no turning back the higher wage rates. The pandemic receding should lead to EPS receding as well.
Grocery share losses (KR, ACI, SFM)
Publix reported a 10.5% SSS increase in Q4, accelerating from 6.3% in Q3. SSS for the year increased 5.4%, “primarily due to increased product costs.” Gross margins for the year contracted 50bps. Excluding a LIFO credit gross margins contracted 20bps. Operating expenses leveraged 10bps for the year. Advertising expenses increased 14% to $280M for the year. EPS for Q4 increased 4% YOY. Publix has 1,293 grocery stores in the Southeast, concentrated in Florida. It opened 45 new supermarkets and closed 16 during the year. Publix out comped the grocery industry with Walmart reporting a HSD% growth in groceries, Target reported double-digits lapping double-digits, Albertson’s reported 5.2% (in the quarter ended November), Kroger reported 4%, and Sprouts Farmer’s Market reporting a 1.1% decline. Kroger, Sprouts Farmer’s Market, and Albertson’s are pleased with their better than expected SSS during a food inflation spike during an Omicron variant outbreak, but there is no mention of market share losses.
