April CPI for food at home continues to accelerate
The headline CPI for April increased 0.3% MoM and 8.3% YoY. Energy prices declined 2.7%, but food costs continued to increase. The CPI for food at home increased 10.8% YoY in April (a 40 year high), accelerating from 10.0% in March. Nearly all food sub-categories continued to accelerate. The meats, poultry, fish and eggs category accelerated to 14.4% from 13.7% and had the largest YoY increase. Cereal and bakery products prices increased 10.3%, accelerating from 9.4%. Dairy prices gapped up to +9.1% from 7.0% in March. Fats and oils increased 15.3% from 14.9%. Coffee accelerated to 13.5% from 11.2%. Alcoholic beverages accelerated to 3.9% from 3.7%, but continue to trail other categories’ increases. Fruits and vegetables were the only sub-category that did not accelerate with a 7.7% YoY increase in April, decelerating from 8.5% in March.
With the lower base effects and CPG companies’ plans to continue to raise prices food at home inflation will continue to accelerate for at least 1-2 months. We’ve been saying this for months, but we are starting to see some consumer shopping behavior change. There is potential for food inflation to decelerate to HSD% in the summer, but it will likely require lower diesel, freight, and commodity costs.
Inflection Q (STKL)
SunOpta reported EPS of $.01, ahead of consensus of -$.01. Revenue grew 15.7%, 9% above expectations with two-thirds from pricing and one-third from volume/mix and an acquisition. Total gross margins contracted 270bps, improving significantly from the 650bps of contraction in Q4. Gross margins are expected to improve each quarter this year.
Fruit-Based revenue grew 18.7% with half of the growth due to a non-recurring sale to its largest customer. Two-thirds of the remainder of growth was due to pricing and one-third from price/mix. Segment gross margins were flat with a 100bps headwind from pass through pricing.
Plant-Based revenue grew 13.4% with pricing up ~8% and volume/mix up ~5.4%. Oat milk sales continue to be the driver with growth of 59% and plant-based milk sales up 18%. Management said they are selling all the oat milk they can produce. Segment gross margins contracted 470bps with a 150bps headwind from pass through pricing and 320bps of headwind from raw materials and freight.
The company reiterated guidance for the year despite the upside in Q1. Q1 likely represents an inflection for the company with improved production leading to better margins. The upcoming analyst day will help investors understand the transformation the company has undertaken and the opportunities in plant based beverages ahead of it in the years to come. For further details see our separate note.
Recovering margins (PRGO)
Perrigo reported Q1 adjusted EPS of $.33, below consensus expectations of $.42, but closer to management’s expectations. Currency neutral EPS was $.37 including a -$.02 impact from Ukraine. Sales grew 6% with organic sales growth of 10% driven by a recovery in cough/cold and infant formula sales. The Nutrition business grew 38% driven by infant formula in the U.S. Perrigo gained five points of share due to new launches and possibly trade down by consumers. Notably, the shortages in the market only had a small impact towards the end of Q1.
Gross margins contracted 140bps sequentially and 540bps YoY driven by one-time items, product mix, the lag in price increases compared to cost increases. Management expects a 400-500bps recovery by year end driven by price increases, the sale of the Latin American business, and the inclusion of HRA Pharma’s 70% gross margins. CSCA gross margins were the most impacted and contracted 640bps. The sequential worsening was attributed to one-time items. CSCI gross margins contracted 180bps due to product mix.
Management guided EPS for the year to $2.30-2.40 from $2.10-2.30 reflecting the acquisition of HRA Pharma. HRA Pharma is expected to contribute $.35 for the year while the Ukraine war, Fx, and higher refinancing costs are a $.20 headwind. Organic sales growth is expected to be 8-9% from 7-8% previously. Management was optimistic in regaining gross margins in the 2H. The CEO was even more optimistic about the HRA Pharma acquisition saying, “This will be the best acquisition I’ve ever done in my career.” We believe the current share price is a compelling opportunity as organic growth accelerates and margins recover. The infant formula shortage is a new investment theme, but our other four themes have not changed:
Still on track for the long term plan (NOMD)
Nomad Foods reported Q1 EPS of €.43 vs. consensus of €.38. Revenue grew 3.6% due to the acquisition of Fortenova and organic revenue decreased 4.5%, flat sequentially. Gross margins contracted 250bps, improving sequentially from -500bps. Headwinds were higher input costs of 200bps and 50bps from lower seasonal margins from the acquisition (the summer Qs being higher). Plans include a second round of price increases in the 2H, but there could be a third round near year end. 85% of input costs for 2022 have been hedged. Management is committed to recovering margins this year. EBITDA margins contracted 150bps. Management reiterated EPS guidance of €1.71-€1.75 and modest organic revenue growth for the year.
Noam Gottesman, co-founder and co-Chairman, has entered into discussions with fellow co-founder and co-Chairman Martin Franklin to evaluate potential strategic alternatives (which they should be doing all the time). The company has been actively repurchasing shares, so an alternative should be something more than that. Nomad Foods has navigated cost pressures well, but it was felt later in Europe than in the U.S. The inflationary environment seems unlikely to knock the company off its annual long-term plans for LSD% organic revenue growth and double-digit EPS growth, few CPG companies can say that.
Not waiting for an IPO (SFM)
Cencosud announced that it will acquire a 67% stake in The Fresh Market for $676M. Cencosud is a South American retailer backed by Apollo. In July the company filed for an IPO, five years after Apollo took it private. The use of proceeds was to pay down debt with The Fresh Market being 5x levered at the time. The Fresh Market operates 160 specialty grocery stores focusing on premium fresh food, curated meal offerings, and competitive prices on high volume basics. The Florida market is a key market for The Fresh Market, with nearly 30% of stores in the state. The competition has grown in the state since The Fresh Market went private, with Sprouts Farmers Market and Aldi opening stores at a fast clip. Publix has over 800 stores in Florida.
