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 out yet, but management has been signing 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.
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Flu monitor (PRGO)
6,465 influenza patients were admitted to hospitals in the week ending November 5, the highest for that time period in a decade. The CDC estimates there have been at least 2.8 million illnesses from the flu this season. There are multiple respiratory viruses co-circulating currently. The youngest ages represent the largest percentage of outpatient visits. Children under the age of four represent more than 3x the percentage of outpatient visits compared to people over the age of 25.
A much higher proportion of flu tests are turning up positive than in previous years. During large flu seasons in the past, the positivity rate peaked at ~3.6%, but last week nearly 13% of flu tests were positive. More people who are feeling sick have the flu than in the recent past. Seven southeastern states are at the highest level of respiratory illness activity on the CDC’s scale. Even states not at the highest level of activity are struggling to keep up. The entire state of Colorado has had between one and five pediatric ICU beds available over the last few weeks. RSV appears to be impacting children more than any other virus. Colorado’s Children’s Hospital said their ER has a daily average of patients 30% higher than the busiest days of previous respiratory seasons.
Perrigo’s Q4 is mostly set for the cough & cold season as orders are already in and production is maximized. A larger or longer cough & cold season would be seen in Q1 results as retailers reorder more inventory.
Bourbon made outside Kentucky? (BF.B)
Kentucky produces 95% of the world’s bourbon and is the only state that taxes aging spirits. The state looks to collect nearly $40M this year up from $33M last year from the tax, the highest in history. Distillers in Kentucky had a record 11.4 million barrels in January, up from 10 million last year. A number of distillers have opened outside the state such that Kentucky is only 12th in the number of distilleries. The funds go to schools and other government agencies like sheriff’s offices. State legislators have formed the Bourbon Barrel Taxation Force to consider a number of options including phasing the tax out, keeping it, or delaying it. The task force meets on November 18, but it could take years to come to a decision. Distillers in the state also pay $300M in state and local taxes as well as $1.8B in federal excise taxes.
