Costco Black Book
We are hosting our Costco Black Book tomorrow at 2 PM ET.
Our macro team is calling for four more quarters of Quad 4, a favorable setup for Costco's share performance. Food retailers benefited from the shift to at-home consumption during the pandemic. Just as COVID-19 restrictions were finally being lifted throughout the country and consumers were resuming their lives, food inflation and soaring gasoline prices have altered their behavior again. Costco's value proposition is positioned to gain share as consumers look to stretch their food budgets. Costco is an attractive capital preservation long for the quad environment with the highest probability of occurring. We see upside potential in both EPS estimates and the multiple as the company takes share and accelerates new store openings. Since we get the most pushback on Costco's pandemic comparisons and valuation, we will exhaust both topics.
The proposed merger between Kroger and Albertsons will alter the competitive dynamics in consumables retail. Since the pandemic outbreak, the CPG industry has been characterized by supply challenges, inflationary price increases, and a drop in competitive intensity. Even if the merger is ultimately approved by the FTC, the regulatory review will be lengthy. Costco is set to take advantage of the interim period while the traditional supermarkets jockey for positioning. Looking out at the competitive landscape in consumables retail over the same duration as the management teams of Kroger and Albertsons reinforces our long positioning for Costco.
We recently added Costco to our Best Idea Long list:
Imports shine, craft and hard seltzer dims (STZ, SAM)
The beer category grew 3.9% from mid-June through Labor Day. Over 62% of the dollar sales growth was driven by the import category, largely Constellation Brands’ imports. Outside of Constellation Brands, notable imports include Sapporo up 13.8%, and Labatt up 3.6%. Mexican beer now represents 80% of all beer volume imports into the U.S. The craft category has been a share donor with sales down 2.3% in the latest 13-week period. Hard seltzer sales fell 12.7% over the same period. Despite the sales decline, the number of SKUs continues to grow. Over the 13-week period, hard seltzer offerings increased by 3%. Modelo Oro should drive further adoption with a lower-calorie offering next year.
Spilt milk (STKL, OTLY)
According to The Independent, the latest environmental trend in the U.K. is a “milk pour.” Protesters concerned about the environment are going into grocery stores and pouring milk on the floor. According to Animal Rebellion, an animal rights group, “The dairy industry is incredibly environmentally destructive. The world’s top 5 meat and dairy corporations are now responsible for more GHG emissions than Exxon, Shell, or BP.” Environmental reasons appear to be a larger driver of plant-based milk consumption in the U.K. and many Western European countries than in the U.S. where lactose intolerance is a bigger factor in the U.S.
