SFM Black Book Today
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Call Details:
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Sprouts Farmers Market is on our Best Idea Short list. 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.
The investment themes for our presentation:
Not feeling the oats (OTLY, STKL)
Oatly reported a Q3 EBITDA loss of $83M, nearly double the consensus estimate of a $43.5M loss. Revenue was 13% below expectations and gross margins were well below projections. Overall revenue grew 17% in constant currencies before a 10% drag from Fx. In the Americas, Oatly revenue grew 23% while volumes increased 17%. Oatly reached an ACV at retail of 36% while the fill rate improved from 67% to 79%. Gross margins contracted from 26.2% to 2.7% due to inflationary pressures and manufacturing issues somewhat offset by higher prices.
Management lowered revenue expectations from $800-830M to $700-720M. Management cited COVID-19 restrictions in Asia, operational issues in the U.S., and Fx. Oatly announced several strategic changes. The company is now looking to partner with manufacturing partners to take on more of the production of oat milk after the initial extraction step. The company is looking for partners in Texas and Peterborough. Oatly is also targeting a headcount reduction of up to 25% of the corporate function costs and regional EMEA layers. In combination with other savings, the company expects to reduce costs by $50M in 2023.
If Oatly had partnered with SunOpta years ago it would not have had the production problems in the U.S. it has experienced. Outsourcing more production would have also reduced the company’s capital needs, instead, a capital raise looms in the future to fund capacity growth. Oatly probably still does not see it this way. SunOpta’s new plant in Texas is slated to open towards the end of the year and already is limited in free capacity should Oatly seek a partnership.
Pricey Beans (WEST)
Westrock Coffee reported adjusted EBITDA growth of 33% in Q3, but was 9% short of expectations. Sales grew 27% due to single cup volumes and green coffee prices offset by a drop in roast and ground coffee volumes. Management attributed the weaker sales to the consumers’ reaction to higher coffee prices as well as other costs like gasoline in the summer. The Beverage Solutions segment grew 25% while the SS&T segment grew 34%. Gross margins contracted 310bps and were negatively impacted by the higher green coffee bean prices. Coffee beans represent 60% of costs and prices increased 45%. Coffee bean commodity costs are known to be volatile, but it has been nearly eight years since prices have had anything close to the increase it has experienced this year. In recent months coffee prices have fallen nearly 30%.
Management lowered sales guidance to $850-890M from $960M. Adjusted EBITDA guidance was lowered to $60-$63M from $75M after reporting EBITDA of $43M through the first 3 quarters. Most of the revision was due to the shortfall in Q3 as sales trends have improve.
The company has accelerated some capex originally planned for Phase II of the Conway facility, incurring $90M more over F23 and F24. The company also announced the acquisition of Kohana Coffee, an extract and RTD business that brings its own packaging lines.
Q3 results were negatively impacted by the surge in green coffee prices. The CPI for coffee peaked at 20.3% in July, one of the highest growth rates of the major food at home categories. Since July, the CPI increase has decelerated for the past three months. The company has contract prices to pass through green coffee bean prices, but many reset every six months. Westrock has several growth projects stretching to the end of the decade. It is unfortunate that in one of its first quarters as a public company guidance was revised lower, hurting management’s credibility, but we do see the context of the environment. We are sticking with the long, as our investment thesis has been the capacity expansions enabling the company to grow into white space opportunities rather than near term commodity cost impacts.
