Idea Hunt (HSY, KMB)
On Monday, December 5th, at 12:30 PM ET, we will host an Idea Hunt call for Restaurants and Consumer Staples. We are hunting for longs and shorts where our estimates differ materially from consensus expectations and where the multiple could be re-rated. We will present our analysis after a further round of vetting on a handful of companies. Our best ideas often are sourced from vetted Idea Hunt companies.
Webcast & Slides: CLICK HERE
The topics we will cover include:
- How to be positioned in Restaurants and Consumer Staples in Quad 4.
- New idea generation heading into 2023.
- Hershey (HSY) is a best-in-class confection and snacking business with strong brands that enable pricing power. Is the margin recovery priced in? Does the valuation already reflect full margin recovery? Does it reflect margin reinvestment and mix headwinds?
- Kimberly-Clark (KMB) has implemented price increases to recapture margins negatively impacted by higher commodity costs. In Q4, consensus expects margins to expand for the first time since the anniversary of the pandemic. Will commodity costs cooperate and pricing power hold up in 2023? How long will it take to return to 2019 margins, and what volumes will be needed?
- We are negative about the food service distribution space. Should SpartanNash (SPTN) be part of that short or the exception? How have the activists changed the company?
- Domino's (DPZ) is a Best Idea Long in Restaurants, but how is its biggest publically traded franchise group, Domino's Pizza Enterprises (DMP.AU), looking?
Waiting for the FTC (KR)
Kroger reported Q3 EPS of $.88 vs. consensus expectations of $.83 due to better sales and margins. ID sales ex. fuel increased by 6.9%, above consensus expectations of 4%. Kroger’s private label brands had ID sales growth of 10.4%, calling out strength in pet foods. Digital sales grew 10% with delivery solutions up 34%. Management mentioned pet food, baby formula, and cold remedies as categories that have supply chain issues. Management said they have seen more engagement with promotional offerings and digital coupons.
Gross margins ex. fuel contracted 5bps. The LIFO charge was $152M compared to $93M last year. OG&A expenses leveraged 3bps. The gasoline margin was $.50 per gallon compared to $.42 last year. Adjusted operating margins expanded by 10bps, but were 50bps above consensus expectations. Management said they are comfortable with the 15% YOY inventory growth seen in the quarter.
Management raised EPS guidance from $3.95-4.05 to $4.05-4.15 and ID sales guidance from 4-4.5% to 5.1-5.3%. The annual guidance implies 4-5% SSS for Q4. The termination of the Express Scripts contract will be a 35bps headwind to sales in Q4. The merger with Albertsons is the most important outcome, but it will be a couple more quarters before we have a better idea of what the regulators will be satisfied with. While gross margins have held up well in a time of extraordinary food inflation the expense leverage has been underwhelming. Passing on higher prices when key competitors are seeing a contraction in other parts of their business is easier than when manufacturers are once again investing in promotions and competitors are looking to food to drive traffic. We removed Kroger from our short list despite our view that it is over earning until we have better insight into the proposed merger with Albertsons.
HIGHER MINIMUM WAGES (STZ)
Mexican President Andres Manuel Lopez Obrador (AMLO) has announced plans to increase the national minimum wage by 20% in 2023. Currently, the minimum wage in Mexico is the equivalent of $8.95 per day across most of Mexico and $13.47 in the free trade zone on the U.S. border. Mexican unions are asking for a 25% increase while the business sector wants a 15% increase. When AMLO took office he pledged to raise the minimum wage by 15.6% per year. In 2019 the minimum wage rose 16.2%, in 2020 it rose 20%, in 2021 it rose 15%, and in 2022 it rose 22%. Two-thirds of the cost of Constellation Brands’ beer is transportation and packaging. Labor costs in Mexico have been a much smaller headwind than other costs in recent years due to the large degree of automation in the breweries.
Chick-fil-A merchandise (LANC)
Chick-fil-A has launched its first merchandise collection called Chick-fil-A Originals. It includes items that feature menu offerings like “Sauce Blanket and Nugget” pillow sets. The company expects the limited offering to sell out quickly.
The sauce has also been selling out which is why Lancaster Colony is building a new manufacturing facility to accommodate the growth. Lancaster Colony is the best public way to invest in the growth of Chick-fil-A.
