Constellation Brands (STZ) Black Book
We are presenting an updated Black Book tomorrow on Constellation Brands (STZ) ahead of its FQ1 earnings release.
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
|
Consumer Staples Subscribers CLICK HERE for event details (includes video and materials link) Consumables Pro Subscribers CLICK HERE for event details (includes video and materials link) ***Bonus Content*** |
Constellation Brands historically has outperformed the S&P 500 in Quad 4. On an absolute basis Quad 4 is the second-best Quad for Constellation Brands' share price performance. We will outline our investment case for STZ being an outperformer over the short and long term. STZ is a top Best Idea Long.
Burger King Franchisees
Restaurant Brands is a SHORT
McDonald's momentum and the leverage in the BK system could be a problem.
On Tuesday, Fitch Ratings lowered the bond rating for GPS Hospitality, a 400-unit franchisee that is Burger King's third-largest operator. Last week, Standard & Poor's gave GPS a negative outlook, though it reaffirmed the company's rating. Weak sales at Burger King coming out of the pandemic, coupled with historically high inflation and rising demand for delivery (dilutive margin transaction), have taken a massive toll on the profit margins for the brand's franchisees.
That negative outlook for "Burger King's U.S. systemwide same-store sales compared to pre-pandemic have been flat to negative since early in the pandemic as Burger King tried but failed to replicate McDonald's success with offerings such as the chicken sandwich and celebrity meals and as the company has struggled to transition from paper coupons to digital promotions," Fitch wrote in its downgrade.
According to Fitch, GPS's EBITDA margins have declined to 4.5% in the first quarter of this year from 7% in 2020. GPS's sales declined 4.2% in the first quarter, according to S&P. Standard & Poor's downgraded Carrols Restaurant Group, Burger King's largest franchisee, citing the same issues of weak sales coupled with rising costs. The downgrades highlight the mounting challenges among operators at brands whose sales have been unable to keep pace coming out of the pandemic.
Burger King's same-store sales have lagged behind MCD for years!
Carrols historically has performed better than the Burger King system as a whole. Its financial problems this year have raised questions about the broader system performance. According to rating agencies, GPS's sales have lagged for several quarters, citing labor challenges and weather problems. Burger King's broader sales problems have stemmed from failed efforts like its chicken sandwich. But the company's move from paper coupons to digital also caused disruptions, given the brand's heavy reliance on discounting.
As we move thru the balance of 2022 and into a potential recession in 2023, concerns that QSR will need to "bail out" weak franchisees will grow.
California AB 257 is a potential problem for the industry.
California lawmakers are considering another flawed idea.
The proposal comes from the bill known as AB 257, the Fast Food Accountability and Standards Recovery Act, or the FAST Recovery Act. The bill is a radical proposal to micromanage the fast-food industry. The FAST Recovery Act would create a council of 11 unelected political appointees—regardless of whether they have any business experience—to run California's fast food restaurant industry from Sacramento. Of those 11, five would be representatives from different agencies in the state government, four would be representatives of restaurant employees and their "advocates," and there would be one each to represent franchisors and franchisees, respectively. This Fast Food Sector Council would be empowered to establish wage rates, set working hours, and issue other rules and regulations for all fast-food restaurants whose brands have more than 30 locations nationwide, of which there are many, even though most such restaurants are individually owned and operated by franchisees. In fact, according to the Stop AB 257 Coalition, about 34,700 food franchises are owned by 14,422 franchises in California.
AB 257 also would fundamentally alter the franchise model. The proposal would impose joint and several liabilities on franchisors for alleged violations by their franchisees. For good measure, AB 257 also abrogate franchise agreements that waive such liability and prohibits franchisees from indemnifying their franchisors. Given this potential liability, franchisors would, by necessity, have to take a much more direct role in operating individual locations separately owned and operated by their franchisees. On the surface, the fundamental goal of this legislation appears to force franchisors to accept unionization at their various locations. A proposal like AB 257 would make it much more challenging and more expensive for restaurant owners to operate. The consequences of this legislation would be widespread, and consumers would be hurt by increasing prices more than they already are.
CHEF Better than Expected
CHEF is a SHORT
Why did this press release come out now and not prior to the appearance at the Jefferies conference two days ago?
Based on current trends in the business and the outlook for the remainder of 2022, CHEF is raising FY2022 guidance. We see this move seems slightly premature given where we are in the cycle. CHEF raised FY EBITDA guide by 26% at the midpoint with the stock only up only 5% on the day; boosted FY revenue and gross profit guidance as well; cited strong customer demand despite inflationary food environment and challenging supply chain backdrop. The company said net sales to be in the range of $2.325B to $2.425B, compared to the prior range of $2.13B to $2.23B and consensus of $2.24B; Gross profit to be in the range of $542M to $565M, compared to the previous outlook of $500M to $524M; Adjusted EBITDA to be in the range of $130M to $140M, compared to the prior view of $103M to $112M.
"Strength in customer demand along with our team's ability to merchandise the world's finest ingredients with just-in-time service continues to drive solid financial performance, despite a challenging supply chain and food inflationary environment," said Christopher Pappas, Chairman and Chief Executive Officer of the Company. "We look forward to leveraging the investments we are making in talent, capacity expansion, technology, and operational process improvements to continue driving growth and increased efficiencies."
Not sure what the management of CHEF is seeing today, but sales at independent restaurants and casual dining chains are slowing. It's natural to expect that as we move into 2023, we can expect independent restaurant chain closures and bankruptcies.
