August food CPI accelerates (WMT, GIS, STZ)
The headline CPI for August decelerated 20bps to 8.3% YOY, 20bps above consensus expectations. Food price increases were the highest since 1979. The differential between food at home and food at home remained the same in July at food at home increasing by +5.5% more. The CPI for food at home inflation in August accelerated for the 15th consecutive month to 13.5% YOY, up 40bps sequentially.
Meat and coffee were the only sub-categories that did not see an acceleration in August. Meat CPI decelerated for the fourth consecutive month to 10.6%, slowing 30bps sequentially. Poultry CPI increased by 15.9%. Fruits & vegetables increased 9.4%, fats & oils increased 21.5%, and the dairy category increased 16.2%.
Cereal & bakery products CPI increased 16.4%, accelerating 140bps from July. The category has seen a rapid acceleration in price increases of 14.6% since December as seen in the chart below.
The CPI for alcoholic beverages only increased 4.3% YOY, a 10bps acceleration from July. The CPI for alcoholic beverages increased by 3.2% at home and 5.7% away from home. The beer category CPI increased 4.9% at home, leading the alcoholic beverage categories as brewers have signaled a new round of price hikes. Wine CPI at home increased 2.5% while away from home increased by 7.1%. Spirits’ CPI increased 1.7% in comparison. Constellation Brands’ pricing of 1-2% lags the category.
Beer’s off and on-premise trends (STZ)
YTD through August 20, total beer sales are up 0.3% in the off-premise channel according to NielsenIQ. The fastest growth has been in RTDs which are up 58.1%. The largest contributor to total dollar growth has been imports, which are up 8.2%. Domestic premium beer and below premium beer are both down 1.4%, while domestic super premium is up 2.3%. FMBs are up 11.4%. Craft beer sales have declined by 5.9%. The only other beer category with weaker sales trends was hard seltzer which decreased by 10.2%. Roughly one-quarter of the 16,000 craft beer brands have grown in 2022. Craft beer sales are down roughly 5% in the grocery channel YTD.
Draft beer consumption increased 21% this past weekend, the opening weekend for the NFL. Michelob Ultra gained the most share nationally in on-premise locations at 11.3%. In Los Angeles, Modelo Especial had the greatest draft share at 11%, but draft beer sales in the city fell 11%. Compared to the pre-pandemic 2019 opening weekend of the NFL draft beer sales are still down 17%. Constellation Brands remains the growth story in the beer category.
Long list removal (VWE)
Vintage Wine Estates reported Q4 EPS of $.17 vs. consensus of $.09. Revenue growth of 32% was in line with expectations. Organic revenue growth was 9.1%.
- B2B sales grew 55% driven by bulk distilled alcohol sales. Private label revenue decreased modestly due to a lack of inventory availability for certain programs.
- DTC organic sales growth was 10% driven by strong traffic trends in tasting rooms and wine membership growth.
- Wholesale revenue increased 23% due to acquisitions. Organic revenue decreased slightly due to program changes and tight supplies. Depletions decreased 11.6%. Total case volumes increased 71.4%.
The quality of the revenue growth was disappointing with bulk sales, private label programs decreasing, and wholesale organic revenue declines.
The company recorded $19.1M in non-cash inventory adjustments to establish reserves and physical inventory adjustments. The company also recorded $6.8M in overhead costs in Q4 related to the 1H. Supply chain challenges resulted in higher operating costs and inefficiencies. The company adjusted an error in the accounting for the treatment of interest rate swap agreements that understated EPS by $.11 and overstated liabilities of $1.6M. Material weaknesses were identified and several new executives were hired including a new CFO in March from Constellation Brands.
Adjusted EBITDA decreased $3.9M to $7.6M. $2.5M is not expected to repeat while another $2.5M is due to supply chain equipment delays. Adjusted EBITDA margins contracted 100bps.
Management’s initial guidance for F2023 is for revenue to be between $300-$310M. Adjusted EBITDA is expected to be between $55 to $65M. We are removing Vintage Wine Estates from our long list as we assess the company’s ability to execute upon the opportunity while addressing organizational and operational challenges. We are not as alarmed by the accounting issues as we otherwise would be, since they were the result of the new financial reporting team. We do not have the visibility in top line growth drivers we thought we had. Our projections are now below management’s guidance. Shares are trading between 10-11x 2023 EV/EBITDA. The valuation does not seem as compelling given the visibility in the wine sector and management’s ability to execute.
