COST Black Book (COST)
Our long Costco presentation will be at 2 PM ET today.
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. The timing of our call is opportunistic coming on the heels of the largest supermarket merger announcement. So we’ll spend some time on the implications. 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’ll also address the pushback on valuation.
More capital, more concerns (APPH, KAL)
Soli Organic, an organic produce company, raised nearly $125M. The capital is targeted towards its goal of having 15 soil-based indoor farms nationwide. The company is the largest national grower of fresh, organic herbs. Soli Organic has been transitioning into indoor grow facilities. Unlike most other indoor grow farmers, Soli Organic grows its herbs in soil. The company also is differentiated by targeting lower prices at retail than field-grown plants. The Series D round was the company’s third in the past year. Soli Organic raised $50M in May and $120M last October.
Controlled environment agriculture companies have continued to raise investment capital despite the recent market volatility and higher interest rates. Last month Gotham Green raised $310M. The industry’s ready access to capital is also a challenge with so much capacity being constructed while efforts to grow demand are notably behind.
New Dressings (LANC)
Chick-fil-A is launching its salad dressings in the retail channel later this month. The popular QSR will release four of its most popular salad dressings at participating Walmart, Kroger, and Meijer stores in Cincinnati and across Tennessee. The dressings will go national in Spring 2023. Chick-fil-A’s sauces were launched nationally in 2021.
Chick-fil-A sales grew 30% for Lancaster Colony last year and represented half of the company’s growth. Lancaster Colony’s capacity has been constrained, limiting its ability to launch new releases. When the sauces were initially launched Chick-fil-A said the royalties would be donated to fund educational scholarships for team members. The company has not announced anything about the dressings. Lancaster Colony could be the best way for public investors to participate in the growth of Chick-fil-A, as it represents nearly a quarter of the company’s sales.
