Margins still lagging (KDP)
Keurig Dr Pepper reported Q2 EPS of $.39 in line with consensus expectations. Sales and gross margins were above expectations, but SG&A was higher.
Price hikes kick in
Sales growth of 13.2% exceeded expectations of 7.7%, with volume/mix of 3.1% and price of 10.4%. Coffee system sales grew 9.1% in constant currencies, with pod manufacturing recovering. Pod sales grew 10%, while brewer sales grew 6%. Prices increased 5.8%, while volume/mix increased 3.3%. Pod volumes grew 4.7%, while brewer volume decreased 4.2%. Cold beverage revenues increased 12.9% in constant currencies with pricing of +11% and volume/mix of +1.9%. Beverage concentrates revenue increased 22.9% in constant currencies, driven by pricing of 19.2% and volume/mix of 3.7%. Latin American beverage revenue increased 26.5% with pricing of 14.5% and volume/mix of 12%.
Margins are still catching up
Gross margins contracted 180bps with pricing still lagging cost increases. Inflation accelerated from 15% to 17% sequentially. Inflation is expected to continue to accelerate in Q3 due to green coffee costs. Management has mostly covered input inflation for the 2H. Transportation and warehousing costs saw significant inflationary increases and were the largest increase within SG&A. The company also increased marketing investments.
Top-line guidance was raised, but not the flow through
Management raised sales guidance to +LDD% from +HSD%, but reaffirmed MSD% EPS growth for the year. The rate of COGS inflation in Q4 is expected to be half of the rate in Q3.
The quality of earnings was much improved from the prior quarter. Visibility has improved with hedges, and pricing has accelerated. Margin inflection will follow.
Alcohol sales cool off (NAPA)
According to IRI off-premise beverage alcohol sales decreased 6.1% week over week for the week ended July 17. Spirits decreased 7.4% week over week but still grew 2.6% YOY. High Noon sales led spirits with growth of 91%. Beer sales decreased 7.2% week over week, but increased 0.2% YOY. In the week ended July 10, beer sales hit the third highest weekly sales ever which is notable because it was not the holiday week. Beer sales growth is due to a small number of brands, with Topo Chico hard seltzer up 133%, Twisted Tea up 46%, New Belgium up 26%, and Modelo up 18%. Malt-based hard seltzer sales decreased 4% in the year ended July 17. RTD sales grew 5% in the same 52-week period, driven by spirits-based hard seltzer growth of 122%, pre-mixed cocktails growth of 61%, and hard lemonade/hard tea growth of 13%. RTD sales grew 3% YOY for the week. Wine sales decreased 3.6% YOY, similar to the -2.2% to -4.3% trend it has been in for the past five weeks. Spirits have gained share in beverage alcohol this year. This year, wine has been weak in the off-premise channel with the further reopening for on-premise consumption. Beer is dragged down by the performance of hard seltzer, but Modelo and discount beers are just about the only growing brand/type.
Naming rights (TAP)
Two weeks ago, the Pittsburgh Steelers announced that the team’s stadium would be renamed from Heinz Field to Acrisure Stadium. The team did confirm that one of KraftHeinz’s ketchup bottles would remain in the stadium and be available for photo opportunities. The food and beverage industry remains active marketing in the sporting world even after Pepsi announced it would no longer sponsor the Super Bowl Halftime show and Budweiser announced it would no longer be the exclusive beer of the Super Bowl in recent months.
Molson Coors announced that it will no longer hold the beer sponsorship at the Milwaukee Bucks’ arena, but that it is going to Anheuser Busch. The switch for the Bucks may be a little personal as Molson Coors employs more than 1,000 people at its Milwaukee breweries and corporate offices. It also follows the Milwaukee Brewers stadium being renamed American Family Field from Miller Park. The finance industry has been active in sports sponsorships which may reflect optimism in the industry. Naming rights can also coincide with peak exuberance by a management team. The price of Bitcoin has fallen more than 50% since the Staples Arena was renamed Crypto.com Arena. Losing naming rights may signal discipline on the part of CPG companies compared to other sectors.
