The Pitch (BJ)
We presented BJ as our investment idea in this month's "The Pitch." Click Here to watch the six minute recap.
Buying baby formula (PRGO)
Perrigo announced the purchase of Nestle’s Gateway infant formula plant in Wisconsin for $170M. Included in the acquisition is the U.S. and Canadian rights to the Good Start infant formula brand. As part of the purchase price, Perrigo will invest $60M to expand production at the site from 29 million pounds to 36 million, representing nearly a quarter more capacity, within 18 months. The acquisition will give Perrigo control over all of its own production. Management said the acquisition will be funded without additional borrowings and is immediately accretive to gross margins and EPS. Perrigo likely acquired the plant and brand at an attractive multiple with few alternative buyers in the marketplace. However, many investors would prefer that Perrigo reduce its debt load. From our standpoint management has been strategic in their acquisition targets and the leverage is instilling more discipline which is a good thing. We do have some concerns the supply situation will be larger after the shortages in 2022, but Perrigo is the low-priced offering. If our estimates are close the leverage reduction will lead to multiple expansion.
Stepping on the price lever (TAP)
Molson Coors reported Q3 EPS of $1.32, $.03 below expectations. Sales grew 7.9% driven by pricing and mix. Shipments were down in the Americas while EMEA and APAC were higher due to the U.K. Sales per hectoliter increased by 9.2%. In the Americas, revenue grew 7.4% with volumes down 1%. U.S. shipments grew 1.4%, while Canada was down. The company continues to see its above-premium brands growing low-double digits while its economy brands were down HSD%. In EMEA and APAC sales per hectoliter increased by 14.3%. Management said the company’s on-premise business has nearly fully recovered to 94% of Q3 2019 levels in the U.S. In comparison, the U.K. has exceeded pre-pandemic levels while Canada has not. COGS increased 13.8% per hectoliter in the EMEA and APAC markets and 11.4% in the Americas. Overall COGS increased 12% per hectoliter, above the revenue growth rate.
Management reaffirmed revenue guidance of MSD%, but lowered EBIT growth to the low end of the previous +HSD% range. Management cited increased inflationary cost pressures and weakening demand in Central and Eastern Europe. Management also lowered the expected tax rate by 1-2% points and D&A by $50M, offsetting some of the EBIT revision. The company’s contracts and hedges put off the impact of inflation last year, so inflation is having an amplified impact this year. Molson Coors has been very aggressive with pricing up nearly 10% in the U.S. market. Its beer brands have been challenged from a market share perspective for years and aggressive price increases will only worsen the losses in the future.
Weak reading from beer distributors (BUD, STZ)
The National Beer Wholesalers Association’s Beer Purchasers Index fell to 37 in October from 45.5 in September. A reading over 50 denotes expansion, while below 50 denotes contraction. Imports were the only beer segment in expansion at 59, down 2 points sequentially. Below premium was 47 flat from September. Craft beer was 23, falling 3 points further from September. Premium lights were 45, falling two points sequentially. Premium regular was 32, down from 36 in September. The FMB/hard seltzer segment was 26, improving two points sequentially. The inventory at risk level was 56, the third consecutive month of expansion. October was a weak start to Q4 for the beer industry. Additional price increases play a part in the weakness in October with pre-loading by distributors. Constellation Brands remains the sector’s growth story while the other categories remain under pressure.
Publix Q3 (KR, ACI)
Publix reported a 7.6% SSS increase in Q3, in-line with other supermarkets that have reported so far (Albertsons +7.4% and Weis Markets +7.9%) and a slight deceleration sequentially from +7.8%. Management noted that SSS was primarily driven by the impact of inflation on product costs. Gross margins contracted 100bps due to inflationary costs not being passed onto customers. Operating and administrative expenses leveraged 50bps from a decrease in payroll and facility costs as a percentage of sales. Operating margins contracted 40bps. EPS of $.24 was up $.01 YOY. Publix’s results demonstrate increasing competitive pressure on supermarkets from the impact of higher inflation.
