February CPI (KR, ACI)
The headline CPI increased 0.8% MOM to 7.9% YOY in February, in line with expectations. Core CPI increased 6.4% YOY and 0.5% MOM. Food at home inflation accelerated to 8.7% YOY in February, a 40-year record, up from 7.4% in January. All six major grocery categories saw price increases accelerate. Meat, poultry, fish & eggs led all categories up 13.0% YOY, accelerating 70bps from January. Produce (+7.7%) and dairy (+5.2%) saw their largest month over month price increases in more than ten years. Grocery item standouts include beef +16.2%, bacon +18.8%, chicken +13.2%, milk +11.2%, and roasted coffee +10.9%.
With the lower base effects over the next several months in addition to CPG companies signaling further price increases the CPI for food at home is likely to accelerate further.
Success in seltzers leads to whiskey (DEO, BF.B)
E.&J. Gallo, the world’s largest winemaker, is rebranding its Spirits division as Spirit of Gallo. The company’s Spirits business is the fourth largest in the U.S. at roughly 20M cases. The company also owns the High Noon brand which grew 200% in 2021. High Noon continues to grow in 2022 despite the category’s weaker trends. Management’s targets for High Noon would take it to the #1 spirits brand in hard seltzer. Management sees High Noon competing in the premium price points of hard seltzer which still has less than 10% share. The hole in E.&J.’s Spirits portfolio is whiskey. “We need to be in American whiskey, which is a top category gap for us, and it will probably be several different segments of American whiskey. But as a family-owned company that’s not in a rush to provide publicly traded quarterly return numbers, we have the ability to be patient and make sure that we’re really choosing the right brands, the right partners for acquisition.”
In the on-premise channel whiskey is tied with vodka at 26% market share. In Q4 whiskey sales grew 98% YOY vs. 93% for vodka in the on-premise channel. American whiskey has 53% share of the whiskey category, followed by Canadian whiskey at 24%, Irish at 17%, Scotch at 6%, and Japanese at 0.3%. The valuation multiples in the category are high with so many active suitors.
2022, a good vintage for wine companies (NAPA)
The Duckhorn Portfolio reported FQ2 EPS of $.16 vs. consensus expectations of $.15. Sales grew 18.0% YOY with volumes up 24.8% offset by price/mix down 6.8%. Sales were driven by the recovery of the on-premise channel, but off-premise depletions grew DD%. Wholesale to distributors grew 30%, direct to retail grew 19%, DTC decreased 24%, and wine club sales grew 8%. Vintage Wine Estates’ sales mix is roughly one-third DTC, one-third wholesale, and one-third B2B. In comparison Duckhorn’s mix is two-thirds distributors, 20% California direct to retail, and 13% DTC.
Gross margins expanded 20bps. Cost pressures are appearing in labor and glass, but grape prices are only up slightly due to the comparison to the 2020 smoke season. G&A expenses grew 36%. Adjusted EBITDA grew 6.6%. Management’s pillars for the future include omnichannel platform, leveraging brand strength, driving innovation, investing in DTC, and acquiring wine brands. Management sees the mid to high double-digit EBITDA multiples for recent deals as “reasonable and thoughtful.”
Management guided the year to $.55-.58 vs. consensus expectations of $.58. Management does not expect pricing to have a material impact on the current fiscal year but expects slight margin improvement in the 2H. Wine acquisitions can come with visible synergies for the acquirers with scale, so there is value that can be created in a fragmented industry. The wine sector is seeing considerably less inflationary pressure in the current environment, creating better visibility of earnings that is not reflected in current valuations.
