When 2022 becomes 2023 (PRGO)
Perrigo reported Q3 EPS of $.56 vs. consensus of $.67. The shortfall was due to a deceleration in the CSCA segment. Organic sales growth was 8% and constant currency sales growth was 12.3% with the contribution from HRA. CSCA constant currency sales growth was 4.0% with organic sales growth of 7.3%. CSCI constant currency sales growth was 28.6%, driven by the HRA acquisition. Fx offset the contribution of HRA as organic sales growth of 8.3% was similar to the reported sales growth of 8.4%.
Perrigo is gaining share in the OTC category, +0.3% points in the U.S. and +1.9% in Europe, but less than investors’ expectations in the inflationary environment. While dollar share gains are more difficult when branded prices are increasing more, inventory levels are also holding back gains. The total U.S. OTC market decelerated from -13.4% in the 1H to +2.3% in Q3. In the U.S., Perrigo sell-through at retail decelerated from +9.1% in the 1H to +5.8% in Q3 while shipments decelerated from +15.3% in the 1H to +4.0% in Q3. Management attributed the deceleration to lower inventory levels, a weaker allergy season, and normalizing trends.
Gross margins expanded 210bps, in constant currencies gross margins expanded 310bps. Gross margins benefited from pricing, higher sales volumes, lapping two product recalls, and the acquisition of HRA. EBIT margins expanded 140bps, in constant currencies EBIT margins expanded 190bps.
Management lowered EPS guidance to $2 - $2.10 from $2.25-2.35, $.10 was due to Fx, and $.15 was due to inflationary cost pressures, labor pressures, and distribution costs. Organic revenue guidance of 9-10% was reaffirmed as was reported revenue growth of 8.5-9.5%. At current levels, Fx is a 5-6% headwind.
Entering 2022 there were several YOY positives including accretion from the HRA acquisition, price increases catching up to cost increases, and a cough/cold season that would lap a weak one that was also negatively impacted by fully stocked shelves from the previous year. During 2022, the Euro became a significant headwind while Abbott’s infant formula plant closure became an offsetting tailwind. The outlook for 2023 becomes brighter as 2022 encounters additional challenges.
Importantly, the environment has several tailwinds for the low-price consumer healthcare manufacturer. Perrigo is not “hoping” for a stronger consumer, more discretionary spending, a change in the competitive environment, or a stronger economy. The economic conditions are in place for Perrigo to achieve top-line growth above the long-term plan and to expand margins. Management still has to execute on raising prices, improving manufacturing throughput, and competing.
For additional details please see our separate note.
Driving SSS (GO)
Grocery Outlet reported Q3 EPS of $.27, a penny ahead of consensus expectations. Despite much better than expected revenue growth of 19% driven by SSS growth of 15.4% vs. consensus of 10.6%, EBITDA was only 2% ahead of expectations. Transactions increased by 7.9% and ticket increased by 6.9%. Gross margins contracted 20bps YOY with headwinds from product and supply chain costs. SG&A leveraged 10bps with store cost leverage offset by higher incentive compensation.
Management raised EPS guidance to $1, the high end of the previous $.97-1.00 range. Q4 SSS are expected to increase by 12%. Management guided Q4 gross margins to contract 60bps due to seasonal product mix and targeted price investments. Last year’s Q4 gross margins being 10bps higher than Q3 is atypical seasonally for the company. The guidance for Q4 includes a return to normal seasonality as well as a strategy to be sharper on price points. The strategy for the holiday season takes into account the inflationary environment while expecting a greater spending response by customers.
The company also announced that CEO Eric Lindberg will transition to Chairman while RJ Sheedy, currently President and 10-year veteran of the company, will become CEO. Erik Ragatz, currently the Chairman, will become the Lead Independent Director. Most public supermarket chains have not suggested an increase in price investment, but the strategy seems appropriate with consumer budgets under pressure. Grocery Outlet’s margins are much more stable than its retail peers due to the franchise model. Driving top-line growth and leveraging sales is the company’s strategy, not a concern about guidance.
Beating a low bar (SFM)
Sprouts Farmers Market reported Q3 EPS growth of 9% to $.61, beating consensus expectations of $.51 driven by better margins. Revenue grew 5% with SSS growth of 2.4%. The average basket grew due to price while units per transaction continue to be down about one item which management said is generally a low-priced produce item. E-commerce sales grew by 19% to 11.1% of sales. Gross margins expanded by 90bps due to lower promotions. EBIT margins were flattish with SG&A deleverage due to new stores, wages, marketing spend, credit card fees, and e-commerce fees.
Management raised EPS guidance to $2.32-2.36 from $2.18-2.26 with Q4 at $.35-.39. SSS are now expected to be up 2% from 1-2%. With food at home inflation above 13%, SSS growth significant market share and customer share of wallet losses. The expectations bar was lower for Sprouts Farmers Market so the higher guidance is a surprise for the shares. Consensus expectations were below last year’s $.56, despite LDD% growth in the 1H. Q4’s guidance is for LDD% growth once again, setting a reasonable bar for EPS growth. Sprouts Farmers Market is losing share and over earning, so it remains on our short list.
