Position Monitor Update
On Friday, October 7 we are hosting a Restaurants & Consumer Staples Position Monitor update call ahead of the Q3 earnings reports.
We see opportunities for several companies with an improving earnings outlook, at the same time, we still see further downside for other companies on the short side of our position monitor. Our changes will reflect where we see the upside/downside in Quad 4. We still think it is too early to invest for what is on the other side of Quad 4.
In Consumer Staples, we anticipate a Q3 earnings season that will be more selective over winners and losers. The Consumer Staples sector is historically one of the best performing sectors in Quad 4. However, the unique challenges in the current Quad 4 environment suggest to us that a basket approach to owning the entire sector is not the way to go. Elevated agriculture commodity prices, strained consumer budgets, a generational high in food inflation, fading transfer payments, and supply chain bottlenecks have created a Quad 4 environment that likely rhymes but does not repeat recent Quad 4s. We expect the list of Consumer Staples stocks outperforming in Quad 4 will narrow this Q3 earnings season as investors have less patience for companies having new issues. With heightened anxiety over the Fed's actions and the economy's resiliency, there is little tolerance for slowing outlooks. At the same time, several Consumer Staples companies will see margins inflecting in Q3 with improving top-line projections. With so many challenges in the broad market, we see a narrower group of Consumer Staples companies will be perceived as the "best house on the block."
Beverage startup (ZVIA)
Liquid Death announced the closing of a $70M Series D capital raising round. The water brand has raised more than $195M, valuing the company at above $700M. According to a lead investor, Liquid Death is “beginning to lay the groundwork for the IPO path in case it makes sense for the business.” The lead investor also said Liquid Death is “the fastest-growing non-alcoholic beverage of all time.” Liquid Death is projecting revenue of $130M this year, up from $45M in 2021. The company plans to launch iced tea in 2023. Liquid Death is perhaps one year behind Zevia in sales. The company’s can packaging featuring skulls is unique for water. Holding a can of Liquid Death and only drinking water reminded me of the bubble gum cigarettes I had in the 80s. Marketing is important, but our beverage recommendations contain alcohol or caffeine.
Village Super Market (VLGEA, KR, ACI)
Village Super Market reported a SSS increase of 5.1% in FQ4 ending July 31, accelerating 50bps sequentially. Sales growth was driven by New York City stores, higher transaction counts, and inflation. Gross margins contracted 20bps after expanding 50bps in FQ3. Gross margins contracted due to promotional spending up 40bps and higher LIFO charges of 30bps partially offset by higher departmental gross margins of 20bps, lower warehouse assessments of 20bps, and a favorable product mix of 10bps. Village Super Market operates 34 supermarkets in New Jersey, New York, Maryland, and Pennsylvania under the ShopRite and Fairway banners. Village Super Market is a small chain, reporting comps well below the rate of food inflation. Transactions were up indicating that consumers managed their overall ticket by reducing the number of items, a shopping trend prevalent in supermarkets currently.
Distributor acquisition (STZ)
Reyes Beer Division announced it is acquiring Capitol Wright Distributing, a Texas beer distributor. Capitol Wright distributes more than 16 million cases to 5,100 accounts in central Texas. Its key suppliers include Constellation Brands, Molson Coors, Boston Beer, Mark Anthony, and Heineken.
Reyes Beer Division is the largest beer wholesaler in the U.S. The distributor has been an important partner in the growth of Constellation Brands as it recognized how to capitalize on Corona and Modelo’s higher sales velocity. Constellation Brands’ share has outperformed in Reyes Beer Division markets. Reyes has been acquisitive in Northern California but recently has expanded its portfolio across the country to 11 markets. The Biden Administration’s executive order on promoting competition last year has not slowed the company’s M&A appetite.
