October PPI upticks (UTZ)
The PPI for food manufacturing accelerated 20bps to 10.4% YOY in October. On a two-year basis the PPI decelerated 90bps to 11.6%. The selling prices for food manufacturers is still in a disinflation trend as we lap double digit increases last year.
The PPI for fats and oils increased 4.7% YOY, decelerating from 12.9% in September. It has been a rapid deceleration in the cost of fats and oils on a one and two year basis. Fats and oils are used in a variety of packaged foods driving up the costs for many categories including snacks, baked goods, dressings, sauces, etc. Lower costs for fats and oils as well as truck freight will be margin tailwinds for UTZ Brands in 2023.
Back to beating (WMT)
After missing or pre-announcing weaker results for the past two quarters Walmart reported Q3 EPS of $1.50 above consensus expectations of $1.32. U.S. SSS increased 8.2% YOY, accelerating from 6.5% sequentially and exceeding expectations of 3.6%. Transactions increased by 2.1%, ticket increased by 6%, and the e-commerce benefit was 0.6%. Food sales continued to grow mid-teens% as the company continues to gain share with the EDLP customer promise. General merchandise categories decreased LSD% with softness in electronics, home, and apparel. While management is sending the message to the vendor community that it will be pushing back on price increases, there is little to be gained by increasing promotions in groceries. Management said they are gaining share among households across income demographics, with nearly three-quarters of the gains from households above $100,000 in annual income. Private brand penetration increased by 130bps with shoppers trading down in categories like dog food, baby, baking goods, and protein. Sam’s Club SSS increased 10%, accelerating from 9.5% sequentially. Transactions were up 4.8%, ticket was up 4.9%, and the e-commerce benefit was 1.2%. Sam’s Club membership increased by 8%. Walmart Connect, the U.S. advertisement sales business, grew by 40%. Walmart international sales in constant currencies grew 13.3% led by Flipkart and Walmex.
Gross margins contracted 89bps, but improved from -130bps sequentially. More than half of the decline was attributed to markdowns and sales mix in the U.S. A LIFO charge at Sam’s Club was $113M. Inventory levels were reduced from +25% at the end of Q2 to +13% at the end of Q3 with the U.S. business up 12.4%. 70% of the increase is attributed to inflation, but management expects continued progress through Q4. SG&A leveraged 75bps due to higher sales and lower COVID costs.
Management guided EPS for the year to decrease 5 to 6% from -9 to -11%. The EPS guidance is based on sales growing 5.5%, up from 4.5% previously. Walmart US SSS are expected to increase ~3%. The company also announced a $20B share repurchase authorization after returning $4.5B during the quarter through dividends and share repurchases. Guidance is set conservatively for Q4 with slowing consumer spending embedded, but without the excess inventory levels expectations will be above consensus. In 2023, the company will incur $1B of LIFO charges compared to $236M YTD for Sam’s Club.
Chick-fil-A Growing north of the border (LANC)
Chick-fil-A is planning to triple its store base in Canada by 2025. The company currently has six restaurants in Canada and plans to open seven to ten locations annually for the foreseeable future. The chain has 2,700 restaurants in 48 states. It opened its first international location in Toronto in 2019. International expansion will likely be a driver over the coming decades for Chick-fil-A. Lancaster Colony could be the best way for public investors to participate in the growth of Chick-fil-A, as it represents >21% of sales and represents half of its sales growth.
