Q&A Call Today
We are hosting our monthly Q&A call today at 12:30.
We will explore the following topics:
- Discuss the pushback and feedback from our recent Black Book calls.
- Discuss the most common and noteworthy inbounds we have received in the past month.
- Revisit recent changes to our Position Monitors.
- Provide updates on some of our best ideas.
- Discuss recent trend changes in consumer spending.
We will also take live questions.
Rising price elasticity, but flat gross margins (KMB)
Kimberly -Clark reported Q3 EPS of $1.40, shy of consensus expectations of $1.44. Organic growth of 5% was slightly above expectations driven by K-C Professional and Consumer Tissue while Personal Care growth was only 2%. Price elasticity increased in the two consumer segments this quarter while margins improved from higher prices.
- In Personal Care, net selling prices were up 8% with product mix up 1% while volumes decreased by 7%. In North America, sales decreased 5% with volumes down 10% and prices up 4%. In Q2, North American prices were up 9% and volumes were flattish. Operating profit fell 15% YOY.
- In Consumer Tissue, net selling prices increased by 9% while volumes decreased by 3%. Sales in North America increased by 5% with selling prices up 7% and volumes down 2%. In Q2, North American prices increased by 7% and volumes rose by 3%. Operating profit decreased by 2%.
- In K-C Professional, sales grew 5% with selling prices up 14% and volumes down 5%. Operating profit grew 24%. Sales in North America increased by 5% with prices up 14% and volumes down 9%.
Gross margins were flat YOY, improving sequentially from a 170bps contraction sequentially, 60bps ahead of expectations. Price increases more than offset higher commodities and Fx headwinds. Input cost inflation was greater than a 700bps headwind. Operating margins contracted 190bps YOY, but expanded 70bps sequentially.
Management continues to target organic sales growth of 5-7% while adjusted EPS is expected to be at the lower end of the $5.60-6.00 range, where consensus is already.
Kimberly-Clark is on our short bias list in part due to the substitution risk as seen in Personal Care this past quarter, price elasticity, and the exposure to European energy costs. The company has leverage of 2.5x, but the maturities in the next several years are modest. The bar has been lowered for Q3 earnings reports. It likely takes incremental negatives to see stock price declines while reaffirming guidance is seen as a positive.
Canopy enters the U.S. (STZ)
Constellation Brands announced that it plans to convert its common shares of Canopy Growth into new non-voting exchangeable shares. Constellation Brands will consolidate all of its U.S. cannabis assets into a single holding company, allowing Canopy to make immediate moves into the U.S. Constellation will continue to own 35.7% of Canopy, but it will distance itself from daily operations and giving up its board voting position. The company will also exchange up to C$100M of principal notes for exchangeable shares. Constellation Brands’ CEO said, “This transaction and the surrender of our warrants are expected to eliminate the impact to our equity in earnings, mitigate risk to our organization, and further reinforce our intent to not deploy additional investment in Canopy aligned with Constellation’s previously stated capital allocation priorities.” Equity losses will no longer impact Constellation Brands’ P&L and make the earnings reports much cleaner. With the super voting share conversion shareholders have the ability to prevent further cash investments in Canopy.
Oat milk gains (STKL, OTLY)
In the year ended September 4, plant-based milk has grown 16.4%. Oat milk continues to drive the alternative milk category with a growth of 44.1% YOY according to IRI. Almond milk, the market share leader at 65.6% was essentially flat at -0.1% with volumes down MSD%. Oat milk’s growth boosted its share to 20.9%. Soy milk, a distant third in market share of 6.7%, saw a 2.1% decrease in sales. Coconut milk sales decreased by 5.4%. All other plant-based milk sales grew 16.4%, gaining 0.3% market share. Mintel expects dairy milk sales to grow 2.3% in 2022, driven by price increases.
