Westrock Coffee IPO Preview (RVAC)
We are hosting a pre-IPO preview of Westrock Coffee on Tuesday at 12:30 PM ET.
Westrock Coffee Holdings is going public through a SPAC merger with Riverview Acquisition Corporation (RVAC). Coffee is a secularly growing category both domestically and internationally. It is also a large, fragmented $318B TAM. Coffee consumption is one of the few consumer habits that accelerated during the pandemic and continued to grow as COVID-19's impact ebbed. Coffee companies have been among the few to have successful IPOs still trading above the IPO price over the past two years. Westrock Coffee will seek to repeat that success when it de-SPACs in Q3.
In our preview, we will conduct a deep dive into the company's history, management's background, the business model, drivers of revenue and margins, its opportunity set, and its valuation framework.
A later margin inflection (MNST)
Monster Energy reported Q1 EPS of $.55 vs. the consensus estimate of $.61 and $.59 last year. Revenue growth of 22.1% was ahead of expectations, but margins were lower. In Nielsen measured channels, sales in the energy drink category increased 11.5% for the 13 weeks through April 23 while Monster grew 10.6%. The CANarchy acquisition added 1.9% points of top line growth in April. The C-store channel has been growing slower than the grocery and direct channels in recent quarters with higher gas prices.
Gross margins contracted 640bps and were 270bps lower than consensus estimates, worsening from 380bps of contraction sequentially. Increases in freight, fuel, cans, and other input costs were headwinds to gross margins while pricing of 3% was a partial offset. The company had to use air freight for some ingredients. Management estimates operating inefficiencies totaled $46M (300bps) in the quarter. Higher commodity and raw material costs totaled $45M and freight rates and fuel were $6M (40bps). The company is planning an additional 6% price increase in the U.S. effective September 1. Distribution expenses deleveraged 100bps. Operating expenses leveraged 290bps.
Many of Monster Energy’s cost headwinds will reverse in the coming quarters, but the company has lagged most CPG companies with the timing of price increases. The company’s margin inflection will trail its peers. Last week we vetted the investment case for Monster Energy in our Idea Hunt. We would be more constructive on the shares if investors lose patience with the timing of the margin recovery.
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Q3 miss from “Gross” margins (LANC)
Lancaster Colony reported FQ3 EPS of $.71, including adjustments for the Bantam Bagel impairment, Project Ascent, and contingent consideration, compared to $1.35 last year. Sales increased 12.9% with retail up 7.4% and foodservice up 19.8%. Retail sales were driven by Chick-fil-A and Buffalo Wild Wing sauces, Sister Schubert’s, and price increases while volumes decreased 2%. Foodservice was driven by price increases and the on-premise recovery while volumes decreased 2%.
Gross margins contracted nearly 1,000bps, worsening from 600bps sequentially. Raw material inflation was nearly 30% driven by soybean oil (50% of the inflation) and wheat (~16% of the inflation), contributing 300bps of pressure. Freight costs were also up 30% and contributed 350bps of pressure. Co-manufacturing costs contributed 100bps of pressure. Supply chain challenges represented the remainder of the gross margin headwinds. In late April, the company raised prices in its frozen bread and pasta products. The company is also raising prices in dressings and foodservice. For the retail segment price increases were 6% in FQ2, 6% in FQ3, and 8% in FQ4. For the foodservice segment price increases were 5% in FQ3, 20% in FQ3, and mid-20% in FQ4. Gross margins have probably bottomed with additional price increases in the current quarter, but expansion will likely require commodity costs to reverse while freight rates have already peaked. While the inflationary pressures are still significant, labor is the only component that is unlikely to reverse over a multi-year duration.
Retail labor shortage (KR)
Hy-Vee asked up to 500 corporate-level employees to move into retail positions. The company is short several hundred retail positions. In March more than 100 corporate office employees were asked to make a move to the stores. Hy-Vee said it will be asking up to 500 additional corporate employees to make similar moves. A company spokesperson said, “Last week, we invited all corporate office employees to attend an internal job fair to continue our efforts to see if any of our retail leadership openings may be a good fit for them, as many in our corporate office have retail experience. We currently have approximately 400 store leadership positions open across our eight state region.” Hy-Vee is an employee owned food retailer. This labor shortage is an unprecedented challenge. The unionized grocers could have a labor advantage in the tight market if they are better able to hold onto employees for their retirement benefits.
