Foodservice Black Book Today
CALL DETAILS:
Date & Time: Monday, November 14th @ 12:30 PM ET
Webcast & Slides: CLICK HERE
Add Call Details to Outlook Calendar: CLICK HERE
Thesis Points
- The Cycle: We are very bearish in the current restaurant environment. The Foodservice distributors have seen a rather long rebound from the effects of the COVID pandemic. The rebound in volume occurred in CY2Q21, and now five quarters later, the industry seems to be back on track to continue with pre-pandemic expectations. Except. While restaurant industry sales trends and employment data have been resilient in Sep/Oct, as have the employment data. As we head into 2023, the industry is at risk of a significant slowdown in volume.
- Deflation: Deflation is not in anyone’s current vocabulary, but that will change. As we move from a significant inflationary environment to a deflationary one, the stocks will underperform. As the deflation story takes hold, the industry’s ability to generate gross margin dollars growth will be impacted.
- Challenged Biz Models That Have Not Recovered From The Pandemic: While not new to most investors, the food service industry business models are challenged. They have meager margins and returns. As we have seen with SYY labor union issues in New England, employees want more pay and benefits, and the business models can’t afford it. Industry operating margins are below pre-pandemic levels, making the next downturn even more challenging.
The Carenage in ULTRA Fast Delivery
Nobody is making money in the ultra-fast delivery, is this good news for DASH?
Delivery startup Getir is said close to acquire Gorillas in a cash-and-stock deal for less than $1 billion. A deal is expected in the coming weeks, according to an Insider report. The news comes after Bloomberg last month said that Getir was in talks to buy Gorillas, though it didn't disclose a price. According to the Bloomberg report, gorillas, which raised funds at a $3 billion valuation last year, has previously had discussions with several competitors about a merger or a sale. Getir, in March, said it raised $768 million in a Series E funding raising round at an $11.8 billion valuation. Looking at DASH's 3Q22 quarterly earnings from last week, the company appears to be losing at least ($0.70) per order as it accelerates non-restaurant transactions like groceries as it tries to compete against Instacart and others. In 3Q21, before the Wolt deal closed, it appeared to have lost ($0.29) per order. Order growth is slowing, with 3Q22 showing the first QoQ decline in orders ex Wolt and losses are accelerating. How long will management be able to explain away the trillion-dollar TAM they are going after and not make any money?
Best Idea Short Black Book (SFM)
Sprouts Farmers Market is losing share within food retail and is over-earning post-COVID19. After beating a low bar in Q3 and raising guidance, the setup for Sprouts Farmers Market is attractive on the short side. Q4 will not have the upside that Q3 did. 2023 will not have the price elasticity that 2022 did. The competitive environment is transitioning as in-stock levels return to normal, promotions return, and unit demand growth recedes. Supermarkets are losing share to other food retail channels as consumers look to stretch their food budgets. Sprouts Farmers Market is on our Best Idea Short list.
We have several concerns about the share performance from current levels including Sprouts’ ability to recoup traffic lost during the pandemic, increased competitive intensity, and the risk of losing customer occasions without produce promotions. The company is embarking on an acceleration in CapEx spending for new distribution centers and a ramp-up in new store openings which will depress returns as profits decline against difficult comparisons. Management is rolling out a smaller store prototype that they believe can match the existing stores’ sales. The lower cost footprint and higher productivity are expected to enable double-digit store growth. The new prototype and pricing change have not been proven yet, but management has signed real estate deals to achieve 10% store growth in the future. Our presentation will include an in-depth analysis of the company's real estate locations, characteristics of the better and weaker stores, traffic trends, which markets new openings are slated for, and what those openings portend for future performance.
Call Details:
- Date & Time: Tuesday, November 15 at 12:30 PM ET.
- Webcast & Slides: CLICK HERE
- Add Call Details to Outlook Calendar: CLICK HERE
