Dividend postponement (KR, ACI)
Kroger and Albertsons have a 5 PM deadline today to respond to the request from several state Attorney Generals to postpone the $4B special dividend. Several unions are also requesting the special dividend be stopped. Albertsons’ response gave no indication that the company is planning to stop the dividend payment. A cash infusion into Albertsons’ pension fund is probably required in order to make the special dividend payment unopposed.
Accelerating Prices (KDP)
Keurig Dr Pepper reported Q3 EPS of $.46, in line with expectations. Sales growth of 11.8% was driven by a 12.1% price increase (accelerating from 10.4% sequentially) while volume and mix were down 0.3%. The earnings quality was subpar with both revenue and margins below expectations and lower interest expense.
- Coffee Systems sales increased 5.2% in constant currencies with price of +7.8% and volume mix of -2.6%.
- Packaged Beverages sales increased 13.6% in constant currencies with price of +13.6% and volume/mix flat.
- Beverage Concentrates sales increased 17.3% in constant currencies with price of +16.6% and volume/mix of +0.7%.
Gross margins contracted 160bps and were slightly below expectations. In Q2 gross margins contracted 180bps. Operating margins were 250bps lower YOY. Management reaffirmed sales and EPS guidance for the year. We recently removed KDP from our Long List. Despite the aggressive price increases, gross margins did not improve much sequentially. The earnings quality suggests to us that 2023 will be subpar from a growth perspective.
Truck rates fall (UTZ)
Dry van spot rates have fallen by over $1.00 per mile or 36% since the beginning of the year. Last week rates fell $.04 per mile to a national average of $1.71 per mile. Dry van rates are now $.72 per mile lower YOY and $.03 per mile lower than in 2018 and $.02 per mile higher than in 2017. The top 50 van lines averaged $2.08 per mile, $.37 per mile higher than the national average. The slowdown in ocean container volumes has weighed on trucking rates. The port of Los Angeles had the lowest loaded imports for the month of September since 2009. Truck rates have been one of the largest cost headwinds for CPG companies, especially for lower value products like chips.
SHRINKFLATION (UTZ, HSY)
CPG manufacturers are raising prices and shrinking package sizes to offset inflationary cost increases. Paying more for less has been called "shrinkflation." Paying more for less can often upset customers, so why do the companies do it? They do it because it works. According to Kroger’s retail data science, insights, and media company 84.51º, 29% of shoppers said they have not noticed shrinking package sizes. Of the 45% of shoppers who have noticed the smaller sizes they are nearly split between those that will still purchase the item and those who will only purchase it if they have a coupon. 17% said they wouldn’t purchase it at all while 10% said they would purchase more packages to ensure having enough supply. The most common categories that consumers have noticed smaller packages are chips (50%), cereal (33%), bacon (28%), ice cream (26%), candy bars (23%), and toilet paper (23%). CPG companies use shrinkflation or “weight out” most effectively in categories without standard package sizes like snacks. It’s not as easy to sell less than a dozen eggs. Halloween candy purchasers will see the impact of shrinkflation, but the industry is saying it is to reduce calories. The National Confectioners Association said that 85% of chocolate and candy sold today comes in packages containing 200 calories or less. Candy may have been the first category to see shrinkflation. In the 1950s, vending machine operators balked at the price of candy going from five cents to six and requested smaller sizes instead.
