Black Book Invite (STZ)
We are presenting an updated Black Book on Constellation Brands (STZ) ahead of its FQ1 earnings release. Our presentation will be on June 23rd at 12:30 PM ET.
Our Black Book will cover the following topics:
- A preview of Q1 results
- What to expect from the Sands' offer for their voting rights
- Rumors of a tie-up with Monster Energy and the most likely scenarios
- A review of recent off-premise and on-premise trends
- An update on the wine and spirits sectors
- What does hard seltzer 2.0 look like for Constellation Brands
- A Canadian cannabis market update for Canopy Growth
- A review of the company's competitive moat
- Where we see upside and downside in the financial model
Q1 review (KR)
Kroger reported Q1 adjusted EPS of $1.45 vs. consensus of $1.30 driven by better margins. ID sales ex.-fuel increased 4.1% vs. consensus of 4.0%. The basket size declined due to fewer units (similar to SFM's experience), but management said visits increased. Digital sales decreased 6%. Management said sales improved towards the end of FQ1 which continued into Q2.
Gross margins contracted 26bps vs. consensus expectations of a 60bps contraction. Strategic price investments and higher supply chain costs were headwinds while sourcing benefits and lapping pandemic expenses were tailwinds. COVID-19 vaccines had the biggest impact in the year prior, but management said it was not meaningful. The LIFO charge was $93M compared to $37M a year ago. For the year management now expects the LIFO charge to be $300M, up $100M over the prior year. The company said its store brand sales outperformed with ID sales growth of 6.3%. Gas was a traffic driver and margin per gallon increased seven cents to $.42. The OG&A rate leveraged 46bps.
Margin comparison summary:
Management raised EPS guidance to $3.85-3.95 from $3.75-3.85, reflecting the upside in Q1. ID sales ex.-fuel are expected to be up 2.5%-3.5, 50bps higher than previous guidance. The tax rate is expected to be 1% lower at 22%. We were modeling better SSS, gross margins, and EPS than consensus estimates reflected. Analysts’ questions feigned surprise that sales lagged behind food inflation, but that has been the consensus case. The traditional supermarkets have been losing share to warehouse clubs, discount grocers, and mass retailers for several quarters. While food inflation has been elevated for several quarters, consumers just started changing their shopping behavior this quarter and the headwinds are intensifying. Kroger has been over earning during the pandemic and is on our short list.
Returning to the office (ACI)
Office occupancy levels are still well below pre-pandemic levels, but the YOY trend is strong. In May, office visits to San Francisco, New York City, and Chicago were up 91%, 66%, and 58% respectively. All three cities had occupancy levels that lagged other large U.S. cities last year. Looking back at office building traffic YOY, growth decelerated in September and October which coincided with the Delta variant, and again in January and February which coincided with the Omicron variant. According to a survey by WFH Research, only 49% of workers whose employers have ordered them back to the office full-time are showing up in the office all five days of the workweek. Companies that are asking employees to return to the office two, three, or four days a week are seeing a higher percentage, 84%, of compliance. In New York City only 8% of workers are in the office five days a week according to the latest survey from the Partnership for New York City. The office occupancy will determine how permanent the food consumption shift is from on-premise to off-premise.
On track to de-SPAC (RVAC)
Westrock Coffee reported its Q1 results last week. Sales grew 20%. The Beverage Solutions segment grew 16.6%. The segment’s EBITDA grew 28% due to a favorable customer and product mix, favorable purchase price variances, and improved operational efficiencies. The Sustainable Sourcing & Traceability segment grew 35.6% with higher volumes and green coffee prices. The segment’s EBITDA grew to $1M from $0.2M. Total adjusted EBITDA grew 37% to $11.4M.
Management reaffirmed guidance for adjusted EBITDA of $75M. The company also upsized its credit facility by $50M to $350M. The company continues to target a de-SPAC in the third quarter. Management is close to filing their response to the SEC’s comment letter regarding the S-4 registration statement. The company will host an analyst event on June 28th.
