Position Monitor Update (CELH, HLN, KMB, HNST, SOVO)
We are hosting our position monitor update call today at 12:30 PM ET ahead of 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 in 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. 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." For further detail see our separate note.
Our updated position monitor:
2H Margins contract (STZ)
Constellation Brands reported comparable basis EPS of $3.33 excluding Canopy equity losses of $.16, above consensus expectations of $2.98. Total revenue grew 12% with Beer up 15% and Wine & Spirits up 1%. Shipments for beer increased 12.1% while wine and spirits grew 0.7%.
Beer sales grew 15% with shipment volume growth of 12%. Beer depletions rose 8.9%, accelerating slightly from 8.7% sequentially. Modelo Especial depletions rose 10% and was the #1 brand share gainer in IRI measured sales. Corona Extra depletions rose 6% and was the #3 share gainer. Pacifico depletions rose 37%, rebounding after some earlier shortages. Constellation Brands gained 1.8% points of share of the beer category in FQ2.
The Beer division EBIT margins expanded 330bps, inflecting from -260bps sequentially. Pricing, anniversarying a hard seltzer obsolescence charge, lower marketing (-170bps), and fixed cost absorption drove the increase. In the 2H input cost pressures will accelerate. Pricing plans are accelerating from 1-2% to 2-3%. Management expects Beer’s sales to grow 8-10% for the year, up from 7-9% previously. Beer’s EBIT is expected to grow 3-5%, up from 2-4% previously. Management expects EBIT margins in the 2H to contract due to ongoing inflationary pressures, favorable hedges rolling off, and new brewery capacity coming online.
Wine and spirits sales increased 1%. Shipments were flat and depletions decreased by 2.2%. Wine EBIT margins contracted 40bps, improving from -330bps sequentially. The increase in COGS was primarily from higher supply chain costs, grapes, shipping, and packaging. Wine sales are expected to decrease 2% to flat, up from down 1% to -3% sequentially. Wine’s EBIT is now expected to grow 3-5%, from 4-6% previously.
Management announced the sale of several mainstream wine brands. Constellation Brands continues to pare down its wine portfolio to find a business that can reliably grow. The company also recorded a $1.1B impairment on its investment in Canopy (a rather remarkable figure that deserves more reflection by management and the board).
Despite the 1% acceleration in pricing, management expects margins to contract again in the 2H. Consequently, we are moving STZ a couple of slots lower on our Best Idea Long List. We expect that to be temporary with sales accelerating in 2023 behind Modelo Oro’s national launch.
Fewer units (HSY)
In the 52 weeks that ended September 11, the candy, mint, and gum category had sales growth of 11.1%. In the four weeks that ended September 11, candy sales accelerated to 12.7% growth. Chocolate sales grew 9.3% in the 52-week period with unit declines of 1.8% which worsened to a 6% decline in the four-week period. The mass/superstore channel reported stronger chocolate growth rates than C-stores which grew 8%, the grocery channel which grew 7.9%, and the drug channel which grew 6.1%. Non-chocolate candy sales grew 13.3% in the 52-week period and 13.8% in the four-week period. Non-chocolate units grew 2.9% in the 52-week period while in the four-week period units fell 1.3%. The candy companies are happy with that level of elasticity in a highly inflationary environment, but trick-or-treaters won’t be excited about fewer units.
