April PPI topping Process
April PPI increased 0.5% MoM and 11.0% YoY, the second highest level ever, but decelerating slightly from March by 20bps. Food manufacturing PPI increased 14.5% YoY, decelerating slightly from 14.6% in March. With the lower base effect in May we could see an acceleration next month, but decelerating growth is likely for the remainder of the year. With CPG companies continuing to raise prices a margin inflection is coming.
Sticking with positive EBITDA (BRCC)
Black Rifle Coffee Company reported a wider EBITDA loss than expected of -$6.2M vs. consensus of -$2.7M. Revenue growth of 35% was slightly better than expected. Growth was driven by wholesale increasing by 135%. Wholesale doors grew from 42,000 doors to 47,000 sequentially. DTC was flat, but coffee club membership grew 11% to 295,000 from 265,000. The decline was from sales through Amazon or bagged coffee/merchandise which had price increases. Outpost revenue reached $5.5M with the opening of eight company owned locations over the past year.
Gross margins contracted 500bps, improving sequentially from -570bps. Higher coffee and shipping costs were headwinds. The company is raising the price of RTDs in June. Operating expenses doubled as the company added employees and other growth expenses.
- Walmart has increased the distribution from 400 to 4,000 of its stores with all four SKUs.
- The year-end goal for wholesale doors is 75,000.
- There are currently 9 company-owned outposts and 9 franchises.
- BRC has added two additional co-manufacturers to more than double the supply.
- The cold beverage mix in-stores was 40%, notably lower than the 74% at Starbucks, representing future opportunities.
- The club membership monthly churn was 3-4%.
The largest concern from the quarter was management confirming guidance for positive EBITDA guidance for the year. Achieving profitability this year seems more like a leader-imposed target rather than where the business is trending especially with all the growth investments. After reporting an EBITDA loss of $6.2M and guidance of similar margins in Q2, achieving enough profitability in the 2H looks like the proverbial hockey stick. Should profitability be a top priority this year when there are so many investments for growth? Should the company delay hiring an executive, put off a marketing investment, slow outpost growth, etc in order to achieve what is essentially an artificial target that does not have any bearing on 2023? The early success in wholesale and RTD is expanding the TAM. Other investments should be directed to growing the tent.
Inflation acceleration (UTZ)
Utz Brands reported Q1 EPS of $.11, above consensus estimates of $.09. Revenue and margins were above expectations. Revenue growth accelerated to 27%. Organic revenue grew 20.7% with pricing of 9.4% (accelerating 3.4% sequentially) and volume growth of 11.3%. For the 13-week period ended April 3 Power Brand sales increased 20.1% vs. the category’s 13.4% growth. Regional growth has been an investment theme and in Q1 expansion markets grew 17.4% and emerging markets grew 20%.
Gross margins contracted 490bps due to higher input costs and a 130bps impact from IO conversions worsening from 240bps of contraction in Q4. Further price increases are expected in Q2 as well as price increases being contemplated for the 2H. Pricing increased from 7% in January to 11.5% in March. SD&A expenses leveraged by 180bps with 130bps from the IO conversions. Adjusted EBITDA decreased 3.7% YoY.
Leverage was 5.1x at the end of the quarter, a level that negatively impacts the valuation multiple. The leverage is a result of EBITDA being negatively impacted by input cost inflation and the acquisition of several targets. Management expects to reduce leverage to 4x by next year. When leverage is brought down the company will get more credit for the recent acquisitions that have brought revenue and cost synergies.
Management raised guidance for input cost inflation and revenue to offset that pressure. Input cost inflation is expected to increase mid to high teens from low-double digits. Organic sales growth is expected to be 8-10% up from 4-6% previously and the long-term plan of 3-4%. EBITDA guidance remains unchanged at modest YoY growth.
The snacking category has inherent advantages (low private label share and non-standard package sizes) in passing on price increases compared to other CPG categories. Due to significant cost increases in freight and cooking oils compared to other input costs, Utz Brands has seen some of the highest cost pressures in CPG.
