Pandemic behind, consumers looking for savings ahead (GO)
Grocery Outlet reported Q1 EPS of $.22 vs. consensus of $.20. SSS of 5.2% exceeded consensus of 3.1% driven by average ticket. Notably, traffic trends improved sequentially and throughout the quarter while food inflation accelerated and gas prices increased. Units per basket were down in the quarter, but are still up compared to pre-pandemic. Gross margins contracted 60bps to 30.2%, lower than expectations due to accelerated inflation in commodity items. Management said gross margins improved during the quarter and ended in line with the full-year target of 30.6%. SG&A expense grew 10% and leveraged 10bps.
- The deal environment continues to be good.
- 10 of the 28 new stores expected to be opened this year are on the East coast.
- 325 new everyday SKUs are planned to be launched this year on top of 275 in the 2H21.
- With Instacart working out, there are plans for UberEATS and a DoorDash pilot. The higher basket and incremental customers have encouraged further expansion.
Management raised the EPS outlook from $.92-.97 to $.94-.99 with consensus at $.95. Revenue and EBITDA guidance were raised as well. SSS are now expected to increase 5.5-6.5% from 4-5% previously. After guiding to a modest initial outlook for 2022 last quarter, Grocery Outlet has now returned to beating and raising. Combined with a robust outlook for sales driven by inflation itself and consumers looking to offset inflation by shopping at Grocery Outlet we expect the multiple to expand for this inflationary environment beneficiary.
Grocery traffic (SFM, ACI)
Traffic to grocery stores has slowed dramatically YOY beginning in February, but also compared to three years ago or pre-pandemic. Higher grocery prices and higher gasoline prices have become a headwind for customer traffic as seen in the chart below.
Traffic to grocery stores, which was more elevated on a three-year basis than to superstores, weakened since mid-February when superstore traffic has outperformed as seen in the following chart.
Sprouts Farmers Market last week lowered expectations for Q2 after seeing customers reduce items in their baskets in response to rising prices. Albertsons noted in its last earnings call that higher gasoline prices seem to have caused the consumer to consolidate more shopping trips. Whether it is higher gasoline, the fading of pandemic concerns or higher inflationary pressures grocery shopping behavior is inflecting once again.
Beverage inflation (NAPA)
Inflationary headwinds have been a headwind for CPG companies over the past year, but not all product categories have been similarly impacted. Price increases for alcoholic beverages have lagged other categories in beverages as seen in the following table. The beverage category with the highest increase has been sports drinks with price increases of 17.1% in March. Alcoholic beverages on the other hand have lagged in passing on cost increases with spirits, wine, and beer having the lowest level of price increase. According to NielsenIQ the average price for a bottle of wine was $8.52, up 4.1% from $8.18 a year ago. The average domestic bottle price increased 4.2% to $8.46.
Alcohol’s three-tier distribution also plays a role in passing on price increases. The package size for beer, wine and spirits is well established, so it is much more difficult to shrink the size in order to raise the price per unit. We added the Duckhorn Portfolio to our short list due to concerns over the difficulty in raising prices at key dollar price points ($19.99). Large customers can order larger quantities to take advantage of quantity discounts while new retailers would be at a disadvantage with higher price points. So raising prices is challenging with new and existing customers.
