Chicken profits are going up (PPC)
Pilgrim’s Pride reported Q2 EPS of $1.54 vs. consensus expectations of $1.10. Sales growth of 27.3% was 7% above expectations. Gross margins expanded 410bps. Adjusted EBITDA margins expanded 330bps to 13.5%. On-premise demand has shown signs of deceleration, but off-premise demand remains robust, with consumers trading down to cheaper proteins. Corn prices have fallen much more dramatically than on-premise demand. Chicken is well positioned to benefit from changes in consumer behavior and spending. 2H EPS estimates need to go higher. The company’s balance sheet remains under levered.
Over earning north of the border (L.CN)
Loblaw reported Q2 EPS of C$1.69 vs. consensus of C$1.61. Food retail SSS increased 0.9%. Drug retail SSS increased 5.6%. E-commerce sales decreased 17.5%, reflecting the reopening in Canada. The CPI for food purchased from stores increased by 9.6%, similar to what the company saw during the quarter. Management noted that the company’s discount banners continue to strengthen, reflecting an ongoing shift.
Retail gross margins expanded 50bps, driven by a favorable sales mix in drug retail, while food margins were stable. Retail adjusted EBITDA margins expanded 70bps. Management expects retail margins to expand for the year, and inflation is in the process of peaking. Management expects EPS to grow in the mid to high-teens% for the year, in line with consensus expectations.
Loblaw is over earning two years after the initial outbreak of the pandemic and the shift to at-home food consumption. Canada’s on-premise restrictions had a much greater impact than in the U.S. The other side will see sales and margin pressure even in a less competitive market.
OTC and infant formula upside (RKT.LN, PRGO)
Reckitt reported first-half EPS of 187.8p vs. expectations of 152p. Revenue in all three segments and margins were both better than expected. LFL sales increased 11.9% in constant currencies in Q2 and 8.6% in the 1H. Price/mix was +7.4% in the 1H with volume growth of 1.2% and in Q2, price/mix was 9.7%, and volume growth was 2.2%. The U.S. infant formula situation was quantified as a 2.4% benefit to the overall topline growth in the 1H and 3.3% in Q2. Lysol sales decreased 30% as retailers reduced inventory levels but were still 50-65% higher than pre-pandemic levels in the U.S. LFL revenue growth in the Health segment was 22.4% in the 1H and 24.2% in Q2. OTC revenue growth exceeded 60% due to the cough/cold comparison. Health segment operating margins expanded 760bps.
Management now expects LFL revenue growth of 5-8% from the upper end of the 1-4% range. COGS inflation is expected to be in the high-teens%. Operating margins are expected to be similar YOY. Embedded in management’s guidance are the Nutrition segment’s margins to normalize and more inflationary pressure as hedges are renewed at higher rates. Although Reckitt products are branded OTC and infant formula while Perrigo is mostly store-label, the same supply and demand drivers are at work. The one notable difference is the different reporting currencies which currently work against Perrigo and benefit Reckitt.
Beer shipments fall again (BUD)
U.S. beer shipments decreased 3.3% YOY in June, to 16 million barrels, according to the Beer Institute and the Alcohol and Tobacco Tax and Trade Bureau. June was the third consecutive monthly decline and fifth month of decline in 2022. Shipments YTD have decreased 3.7%.
Indoor masking returning (ACI)
Los Angeles County bars and restaurants are preparing for the return of an indoor mask mandate as early as Friday. Restaurants and bars are looking for ways to work around the mandate, the most popular way is outdoor seating. People are used to masking, but masking rules reduce traffic to on-premise locations.
