Q3 Traffic tailwind (GO)
The sequential pickup in customer traffic in Q2 drove Grocery Outlet’s SSS outperformance in Q2. Grocery Outlet traffic as measured by Placer.ai was up 10% YOY in Q3. Trends have tracked similarly in October. The company reports after the market close today. Consensus estimates are for SSS to increase 10.6% YOY vs. guidance of +10%, decelerating slightly from 11.2% in Q2. The Q3 comparison is 5.7% points more difficult than Q2. On the August 9th conference call management said Q3 was “off to a strong start” and raised guidance to reflect outperformance in Q2 and positive quarter-to-date trends.” Gross margins and EBIT margins are expected to contract 10bps YOY. Management guided to 30.6% gross margins or lower YOY despite reporting gross margins expanding 40bps in Q2. Management cited inflationary product and supply chain cost pressures. Management looks to have kept expectations in check for the 2H despite the tailwinds in the business. Grocery Outlet is on our Best Ideas long list.
More of the same (APPH)
AppHarvest reported Q3 EPS of -$.23, better than consensus expectations of -$.30. Revenue was flat YOY at $0.5M. Volumes were down by half and the average price was up 89%. Management attributed the volume declines to plant health issues. The adjusted EBITDA loss was $12M compared to a loss of $16.5M last year.
Management lowered revenue guidance to $14-17M, down from $20-25M previously. Management now expects the adjusted EBITDA loss to be between $72 to $67M, improving from a loss of $83 to $85M. The improvement was due to the delays in the new projects as well as some cost cuts. The company still expects capex to be between $85 to $95M to complete the construction of three projects. The increase in capex is driven by construction delays and supply chain issues. The company’s facilities continue to incur issues, delays, and other unforeseen challenges despite not having to account for farmers’ biggest variable – the weather. AppHarvest is on our Best Ideas short list.
Private Label’s Time (THS)
TreeHouse reported organic sales growth of 16.5% comprised of +20.7% pricing and -4.2% volume/mix. The company said the price gaps between the national and private label brands in its category have widened to 27% compared to the historical range of 21-24%. In edibles, private brand unit growth decreased 1% while national brands unit growth decreased 5% as pricing was up 17% and 16% respectively. Private label brands’ unit growth was 1% in Q3, 900bps better than the growth in national brands in TreeHouse’s categories.
Management expects the demand for private label food and beverages to remain strong. Volumes are expected to be flattish in Q4 due to production constraints from labor and supply chain challenges. Management expects Q4 EBITDA margins to be between 10.5-12% compared to the 8.8% the company reported for Q3. Margin improvement is being driven by pricing, seasonality, and cost savings initiatives. The current environment is a tailwind for private label. Management’s focus is to improve its inventory service levels which were at 96% in October to take advantage of the demand.
