"Inflation is not slowing and customers are continuing to put a few less items in their baskets." - Chip Molloy CFO of Sprouts Farmers Market
Wholesalers outlook strong for imports, but not much else (STZ, SAM)
The National Beer Wholesalers Association’s Beer Purchasers’ Index (BPI) had a reading of 55 in April, improving from 52 in March. A reading above 50 indicates expansion and below 50 indicates contraction. The FMB/hard seltzer reading was 40, worsening from 42 in March. Craft beer’s reading was 48 slightly better than 47 in March. Premium regular was 38, and below premium was 37. The highest reading was for imports at 70, improving from 67 in March. Premium lights were also expansionary at 52. At-risk inventory had a reading of 47 in April down from 56 in March, indicating inventories have corrected. Constellation Brands continues to be the growth story in beer.
Gross margin implosion (OTLY)
Oatly reported Q1 revenue growth of 18.6%, 4% above expectations, but EBITDA was 28% lower than expectations and at -$81.4M, nearly four times greater than the loss last year. Total production decreased 15% sequentially from 142.2 million liters to 120.9 million liters due to Omicron-related factors. Revenue in the Americas grew 40.3%. Management said Oatly lost market share in Q1 to Planet Oat despite having higher sales velocity due to out of stocks. Management said March was the highest month of production in North America as the manufacturing challenges are abating. Management reiterated guidance for revenue.
Gross margins contracted 2,040bps to 9.5% compared to 29.9% in the prior year due to underutilization of new facilities (-970bps), higher raw materials, logistics, and electricity (-760bps), consolidation of the EMEA co-packer network (-290bps), and other items (-270bps) partially offset by a higher share of self-manufacturing (250bps). SG&A increased 56% due to employee-related expenses, higher freight, sales mix, and public company costs. Oatly is raising prices double-digits this summer in the U.S. and MSD% in EMEA. Oatly’s production problems have been a revenue opportunity for Planet Oat and SunOpta. Oatly would have been much better off to have focused on marketing and letting co-packers make the product, especially in its current hyper growth stage.
Seeing consumers purchase fewer items (SFM)
Sprouts Farmers Market reported Q1 EPS of $.79, above consensus expectations of $.72. SSS increased 1.6%, improving from -1.1% sequentially. Traffic was positive, but the basket size was smaller. E-commerce was 11.5% of sales. Gross margins were flattish and better than expected. SG&A increased by 4.5% YOY due to new stores, higher wages, and supply costs. Management guided Q2 EPS to $.49-.53 vs. consensus of $.56. Management now expects comps and EPS to be at the low end of the previous range of SSS between 0-2% and EPS of $2.14-2.24.
It is constructive that traffic to the stores was still up YOY, but customers purchasing fewer items is a reflection of less compelling prices or budgetary headwinds. With food inflation up DD% in the quarter a 1.6% SSS increase reflects market share loss. Management will likely have to respond with more compelling offers in order to keep traffic up. With average units per basket between 11 and 12, it does not take much for the customer to choose to shop for the items elsewhere. SFM was the first grocer to lower its outlook with Q2 comps trending decelerating. The new CFO, Chip Molloy has shown a tendency to guide conservatively at other companies and in his previous interim stint at SFM.
Central Coast acquisition (NAPA)
The Duckhorn Portfolio acquired the 289-acre Bottom Line Ranch in California’s Central Coast. The winery has 265 acres of Cabernet Sauvignon that will support the growth of its Decoy and Postmark wineries. The California wine market was over-supplied going into 2020 which was solved by the combination of the pandemic and smoke taint. If this year’s harvest is not negatively impacted by the elements we will probably be over-supplied again.
