Contemplating inflation and consumer behavior in the 2H (ACI)
Albertsons reported FQ4 EPS of $.75 vs. consensus of $.64. The upside was driven by better revenue with ID sales up 7.5% vs. consensus expectations of 4.3%. Gross margins expanded 10bps, but excluding fuel gross margins were flat. Productivity, COVID related Rx, margins, and a favorable product mix were offset by inflationary pressures on rate, higher supply chain costs, and LIFO expenses. Excluding fuel gross margins expanded 10bps from 2019. SG&A leveraged by 30bps excluding fuel and a favorable pension adjustment. Lower pandemic costs and productivity initiatives were offset by wage rate increases, a discretionary payment to frontline employees, and digital expenses.
For F2023 management guided EPS to a range of $2.70-2.85 vs. consensus expectations of $2.79. ID sales are expected to be 2-3% vs. expectations of 1.8%. Management expects COVID vaccinations to decline 65% in the next year offsetting gross margin tailwinds. Consensus continues to set a low bar for the company, operating in an environment without the elevated level of food inflation. However, market expectations have been well ahead of consensus. The market was disappointed by management’s guidance for sales and gross margins for the next fiscal year. Conservatism appears built into guidance with lower Rx margins, rapid deceleration in food inflation in the 2H, and not including any share repurchase. However, guidance is not contemplating what a 65% drop in vaccination rates would likely imply for consumers' eating at home behavior.
Food CPI continues to accelerate (UTZ)
The headline CPI was 8.5% YOY in March with the month over month increase of 1.2%. Food at home inflation accelerated to 10.0% in March from 8.7% in February. Every category of food at home accelerated in March. Fats and oils, an input cost for many food products including chips, had the largest YOY increase at +14.9%. The meat, poultry, fish and eggs category increased 13.7% YOY in March, accelerating from 13.0% in February. Alcoholic beverages had one of the lowest increases +3.7% YOY. With the base effects for the next three months, food at home inflation is set to continue to accelerate. Consumers have not been able to manage their food at home spending given the unique circumstances.
Mild flu season (PRGO)
During the 13th week of the year, 1.9% of patient visits reported through ILINet were due to respiratory illness that included fever plus a cough or sore throat. The percentage increased 4bps from the prior week as seen in the following chart. 1.9% is below the baseline despite multiple respiratory viruses that are co-circulating. This flu season is higher than last year’s nearly non-existent season, but it is well below every year since 2015-6. However, for the week patient visits are in the middle of the past seven years. This year’s flu season would be a disappointment any other year except compared against last year. It pushes out the cough & cold upside to next year for PRGO, but we still three other investment themes.
