Q4 Results Reading Between the Lines (STZ)
Constellation Brands reported Q4 comparable EPS of $2.37 vs. consensus expectations of $2.09. The upside was due to better sales and margins in both divisions. Beer division sales grew 14% with operating income growth of 21%. Wine division sales increased 5% on an organic basis and operating profit grew 6%.
Beer shipments grew 9.9% while depletions were up 9.8%. Modelo’s depletions were up 17% in the quarter while Corona Extra’s were up 9%. Focus opportunities for Modelo include reaching more non-Latino consumers as it has 80% of Corona’s household penetration rate, draft where it only has 11% national distribution, and several new product launches. For Pacifico the company is targeting 10-15% annual volume growth from distribution. Operating margins expanded 240bps due to lower marketing spend as the company returned to historical seasonal spending patterns.
Wine & Spirits organic shipments decreased 2.5% adjusted for the divestiture of the low-priced brands. Depletions decreased 6.6%. Operating margins expanded 280bps, reflecting price and mix increases as well as the timing of marketing spend.
Management guided the next fiscal year’s EPS to $11.20-11.50 vs. consensus expectations of $11.50. Beer division sales are expected to grow 7-9% with operating income growth of 2-4%. The beer business is only planning a 1-2% price increase despite cost pressures from labor in Mexico, higher transportation costs, raw materials, packaging, and additional depreciation expense from the new plant construction. At this point we expect the company to raise prices by more than the communicated plan. Management said trends in March are consistent with the company’s growth plans for the year despite the difficult comparisons in the month. Wine and Spirits division sales are expected to decrease 1-3%, but operating income is expected to grow 4-6%. Capex spend of $1.3-1.4B includes $1.2B for the beer operations in Mexico. The company announced a $500M ASR, part of the previously authorized share repurchase authorization. 80% of the ASR will be at the previous closing price of $231.81. We made Constellation Brands our top pick following the sell-off over concerns about the rumored transaction with Monster Energy. We did not think an acquisition of Monster Energy was likely. Since then, the Chairman has proposed a 35% premium for the family’s voting control and an ASR is being completed. Those events give us more conviction that a dilutive tie-up with Monster Energy will not occur.
Costs continuing to surprise higher (CAG)
Conagra reported adj. EPS of $.58, down $.01 YOY and in line with expectations. Sales surprised to the upside, but so did COGS. Cost inflation continues to run higher than management’s expectations, particularly in proteins and dairy. The Foodservice division led growth with 18.9% against easier comparisons. Grocery & Snacks organic growth was 7%, above expectations of ~1%. Price/mix was +8.8% while volumes declined 1.8%. Refrigerated & Frozen organic sales grew 3.9% with price/mix of 8.4% offset by 4.5% volume declines. Consolidated organic growth was +6% with price/mix of +8.6% offset by -2.6% of volume declines.
Gross margins contracted 340bps YOY, improving from the 480bps contraction in the previous quarter. COGS inflation was a 1060bps headwind while price/mix was a 570bps tailwind. Total meat based protein inflation for the year will be 50%, responsible for 40% of the total inflation for Conagra. Compared to two years ago inflation for Q4 is up 26% from two years ago. Management continues to cite stronger than expected consumer demand and lower than anticipated price elasticity. Compared to the expectations at the beginning of the year pricing will be 7% for the year compared to 3-4%, but management’s volume expectations have not changed. Operating margins contracted 230bps.
Management lowered EPS guidance for FQ4 to $.64, $.06 less than consensus and the year from $2.50 to $2.35. Organic sales growth was raised from 3% to 4%. Adjusted operating margins are expected to be 100bps lower at 14.5%. COGS inflation is expected to be 16%, up from 14% previously. Management estimates the full year impact of the lag in pricing to be $.30. Conagra’s pricing actions have accelerated over the last five weeks. The company is also planning an investor day on July 28. Despite margin pressures continuing to be higher than management’s expectations the accelerating benefit from price increases has caused margins to inflect. Conagra’s gross margins should expand in a couple of quarters and the pricing actions have not resulted in share loss. The shares are beginning to discount the likelihood that the company can navigate the current environment with the valuation undemanding at current levels.
Online grocery spending falls in March (KR)
Online grocery spending fell 6.5% YOY in March to $8.7B, flat with February according to Brick Meets Click. Pickup sales decreased 11.6% YOY and 5% sequentially. Delivery sales grew 20.7% YOY and 9.3% sequentially. Ship to home grocery sales were flat compared to February but fell by one-third YOY. For Q1 online grocery sales fell 2.6% YOY. In Q1 ship to home (17%) lost six points of share to delivery (38%) while pickup (46%) share remained steady. Online grocery sales represented 13.1% of the total U.S. grocery market, down from 13.7%. Delivery sales had a 13% increase in the number of orders placed by MAUs and a 7% increase in average order value (AOV). Click and collect order frequency fell 8% and AOV fell 4%. Grocers have retained much of their online business even as the pandemic has receded, but that is with a boost from inflation. Online ordering still requires growth in volumes to be reaching the necessary scale for profitability.
