Worse than expected, but smoothed over with a better outlook (KDP)
Keurig Dr Pepper reported Q1 EPS of $.33, in line with consensus expectations. Revenue was above expectations at 6.1% vs. 3.4% expectations, in all segments except Coffee Systems. Volume/mix was down 0.2% and price was up 6.3%. Packaged Beverages growth was 13%. Coffee Systems revenue fell 4.3% due to production challenges. Coffee pod pricing was up 5.4% at retail during the quarter. K-cup pod sales increased 3.6% according to IRI, but shipments fell due to lack of supply from Omicron caused absences. Management expressed confidence that pod production and inventory levels will be fully recovered by the end of Q2. Excluding the shipment decline in Coffee Systems, volumes increased in the other segments.
Gross margins contracted 280bps and were 70bps lower than consensus expectations. Input cost inflation for coffee, resins, aluminum, sweeteners, transportation, and labor was nearly 15%. Operating margins contracted 170bps. The company benefited from several benefits including $38M from its strategic asset investment program, $28M from non-cash stock compensation, and $28M from legal fees which had a “smoothing” impact on bottom line results as cost inflation and coffee pod production were both worse than expected going into the quarter.
Management reaffirmed EPS growth guidance of MSD% growth for the year and HSD% growth in the 2H. Revenue expectations were raised from +MSD% to +HSD% with more visibility in coffee pod production. KDP is on our long list. The company’s visibility and growth rate are attractively valued relative to the competitive set and the broader market. We shuffled several names on our long list moving KDP a couple of slots lower on the Q1 results.
Re-opening is reopened (BUD)
According to BeerBoard, a draft beer consulting company, the open rate for on-premise establishments reached 97% over the weekend of April 21-24. It is the highest level since the pandemic began. BeerBoard will no longer report the reopen rate as on-premise establishments have effectively fully re-opened. Volume per location declined 6.4% compared to the previous reporting period April 7-10. Compared to the same weekend in 2021 volume increased by 3%. The rate of sale fell nationally for the second time, declining 6.5% from the weekend of April 7-10. Fewer on-premise establishments have permanently closed than expected during the pandemic. Government payments provided a needed lifeline and financing has been readily available. What is harder to come by is the labor. Re-opened businesses did not need a full recovery by consumers if there was less competition, but with the competition seemingly in full recovery, customers have to return to pre-pandemic spending.
Ultra-filtered cancellation (CHO, STKL)
Chobani announced that it is ending the production of its ultra-filtered milk that it just launched in February. Inflationary costs for Chobani and its co-packer seem to be the reason for pulling the plug on the new product so quickly rather than a lack of distribution gains. Chobani said it will continue to make oatmilk and creamers in addition to its core yogurt. In 2020, yogurt sales were $1.2B compared to $158M of other products. In March, Chobani announced it was delaying its IPO until later in 2022 or 2023. Chobani wants to show success in new product categories so the cancellation is surprising. Coffee creamers and oatmilk have better growth prospects and larger TAMs.
HRA Closing (PRGO)
Perrigo announced that it will close on the acquisition of HRA Pharma today. Management’s previous expectation was to close at the end of Q2. The earlier closing date will be more accretive than expected. Management did not include the contribution from HRA in their previous guidance. The weaker dollar will cause the contribution to be lower than when the acquisition was first announced. The earlier closing does not change the profitability of HRA Pharma, but it does speed up the timing of the synergies.
