October CPI (WMT, BUD)
The headline CPI of 7.7% YOY in October was below expectations and the lowest level since January. In October, food at home CPI decelerated 60bps from September to +12.4% YOY. The two-year average accelerated 20bps to 8.9%. Most categories of food at home saw disinflation. The meat category led the inflation surge since the pandemic started and peaked first. Meat, poultry, fish, and eggs CPI increased 8.0% YOY in October, decelerating for the sixth consecutive month.
Alcohol and fats & oils are two categories still seeing accelerating inflation. Breweries were later than most food and beverage manufacturers in raising prices. Alcohol CPI accelerated to 5.0% in October from 4.1% in September. The CPI for beer at home increased 6.0% YOY in October, up 1.0% from September. Wineries have had more difficulty passing on higher prices than breweries. In October wine at home CPI increased by 3.2% YOY, up 0.3% from September. Distilled spirits at home CPI increased 0.5% YOY in October, up 0.5% from September.
The fats and oils CPI accelerated to 23.4% YOY in October from 21.6% in September. The drop in sunflower oil supplies from Ukraine has contributed to the surge in prices.
Margin inflection reached (UTZ)
UTZ Brands reported Q3 EPS of $.16 vs. consensus expectations of $.14. Organic revenue growth of 12.6% was ahead of expectations. Overall sales growth was 16.0% with acquisitions contributing 4.7%. Price/mix was up 14.7% while volumes declined 2.1%. Volume was impacted by SKU rationalization and lapping promotions in the prior year rather than price elasticity.
UTZ slightly underperformed in the salty snack category with retail sales growth of 17.2% vs. 19.4% due to lapping some promotions in new territories. The Utz brand which is 52% of overall sales grew 22%, Zapp’s grew 29%, and On The Border grew 12%.UTZ performed strongest in its core and emerging geographies with the growth of 18.2% and 20.6% respectively. In expansion markets, UTZ grew 10.6%.
Gross margins expanded 80bps due to higher prices, mix, and productivity initiatives while higher commodity costs, transportation, and labor inflation were headwinds. Product costs including transportation were 14.3% higher. The shift to IOs for distribution was estimated to be a 130bps shift this quarter with the offset in lower SG&A. SG&A deleveraged 350bps mostly due to incentive compensation. Adjusted EBITDA margins were 100bps higher than Q2.
While the leverage at 5x is high, there are no maturities until 2028, 70% of the long term debt is fixed at 4.6%, and 2023 will be a deleveraging year.
Management raised revenue and EBITDA guidance. Organic revenue guidance is now expected to grow 13-15% from 10-12% previously. Adjusted EBITDA guidance is now expected to grow 6-9% from 2-5% previously. Input cost inflation is still expected to be up mid to high teens. UTZ Brands had greater COGS inflation than most CPG companies due to the surge in freight rates and edible oils while price increases lagged. Now margins have inflected and management has good visibility in pricing covering cost increases in the pipeline. At the same time, management continues to execute on their multiple-pronged initiatives to drive top-line growth. Consensus estimates are not reflecting the upside as pricing catches up to costs.
RTDs take center stage (BRCC)
Black Rifle Coffee Company reported Q3 adjusted EBITDA of -$5.3M vs. consensus of -$7.7M. Revenue growth of 27% was in line with expectations. The company had two manufacturing issues during the quarter. One of the new co-manufacturers had an equipment failure as well as delays in receiving raw materials. Both issues have been resolved, but there will be a residual impact to Q4 as well. The company recorded a $2.9M of expense to replace inventory at customers as well as writing off inventory.
The company now has 11 owned stores and 10 franchised. Outpost revenue grew 65% with the additional openings.
DTC grew 2% in the quarter. DTC subscribers were 278,000, down 10,000 sequentially. DTC is expected to continue to decline HSD% to LDD% due to less marketing investments.
Wholesale doors reached 8,900 while RTD doors have reached 70,000, up from 69,900 last quarter. Wholesale revenue grew 66% with the production issue having a 3% negative impact. In Q4, the company will enter the food, drug, and mass retail channels where 66% of consumers purchase their coffee. with bagged coffee and pods. Currently the RTD offering has an ACV of 42.3% from 13.6% in the C-store and food, drug, mass channel at the beginning of the year.
Gross margins contracted 830bps, but excluding the RTD issue contracted 400bps due to higher coffee bean costs, RTD ingredients, and the product mix shift to RTD which has a lower margin than bagged coffee. The company pulled back on marketing expenses by 650bps to 10% of sales. Salaries as a percentage of revenue increased 350bps. G&A expanded 1,010 bps to 22%.
Management lowered the revenue outlook for FQ3 to $90-$95M. For the year management raised guidance to 37% growth. Management remains “optimistic” for $500M in revenue, representing over 50% growth for 2023. Management is now expecting EBITDA to be a loss this year due to the startup costs for the growth initiatives. BRCC is off to a great start with Walmart. There is so much more shelf space for BRCC to target in the future for Walmart. The current velocity of the business should lead to future gains.
