FQ1 preview (KR)
Kroger is set to report FQ1 results on Thursday. Consensus estimates for EPS, SSS and YOY gross margin are $1.30, +3.9%, and -60bps. Our estimates are somewhat above on all three metrics. With food inflation of 9.8% for the quarter, SSS at less than half the rate reflects share loss to the mass and club channels. We do not expect a reaction similar to WMT’s and TGT’s earnings results. Both companies cited strength in food and excess inventory in general merchandise. BJ and COST have also reported strong food trends without a step up in promotional intensity.
Gasoline margins should be a tailwind given the sudden move in prices as CASY recently reported. Competitive activity is also low as food retailers are passing on prices, the supply chain has not fully recovered, and the mass channel has not used promotions in food to drive traffic to the other parts of the store. LIFO charges will be a headwind. While the worst fears for margins are not likely to be realized in the short term, the picture for sales growth excluding inflation is worsening with increased pressure on the consumer.
Traffic started to decline for Kroger in the beginning of February as seen in the following chart. Trends would be even worse if more states end pandemic food stamp payments.
There are two camps on KR right now – those that think inflation will be a benefit and those that think inflation is not a full benefit, but KR will hold up relatively better than others. Elevated inflation is not a net benefit and there are a lot of companies on our long list to look at. KR has been over earning during this pandemic and is on our short list.
Soybean prices surge (LANC)
Soybean prices backed off an all-time high yesterday. The previous record was set in 2012 during a drought. Soybeans have received less attention than corn and wheat, but soybean prices have also surged. Soybeans are a significant component in livestock feed, its oil is used in a variety of packaged foods from salad dressings to baked goods, and as cooking fuel.
Much of the agricultural complex is in the mode of what else could go wrong. Ukraine’s 6.5 tons of sunflower oil has put considerable strain on soybean oil. Soybean oil prices are near the all-time highs hit in April when Indonesia banned palm oil exports. Indonesia has since removed the ban as it lacks the storage capacity to withhold much of its production. Last week Brazil lowered its projections for its soybean crop from 138.2 million tons last year to 124.3 million tons this year. With fewer places to make up for lost production, prices in the U.S. have encouraged plantings while reflecting growing concerns.
What else could go wrong as La Nina’s lack of jet stream movement starts to result in more hot and dry weather forecasts.
Together like Jack & Coke (KO, BFB, MSNT, PEP, SAM)
Coca-Cola announced a partnership with Brown-Forman to release a Jack Daniels & Coca-Cola RTD. The product will be made with Jack Daniel’s whiskey and Coca-Cola as well as a zero-sugar version. The product will launch in Mexico late this year and then roll out globally. The product will have an ABV of 5%, similar to the majority of hard seltzers.
Coca-Cola has made a considerable push into beverage alcohol recently. It has partnered with Molson Coors to produce Topo Chico Hard Seltzer and Simply Spiked Lemonade. Constellation Brands produces Fresca Mixed. The Jack Daniels & Coca-Cola collaboration will be the first to carry the Coca-Cola brand on the packaging. Other brands will be studying consumers’ reception of Coca-Cola utilizing its brands in beverage alcohol. The genie is probably out of the bottle on this. Boston Beer has launched the first media campaign to support Hard MTN Dew. The industry is still waiting to see Monster Energy’s future strategy in beverage alcohol.
