ICR Conference
The ICR Conference is one of the largest consumer investment conferences of the year. Numerous companies in Restaurants and Consumer Staples are scheduled to present at the ICR Conference on January 9 and 10. We have published a Primer to provide a reference guide for many of the presenting companies in our Restaurants and Consumer Staples sectors. The Primer provides an investment summary for our focus companies presenting at the conference. Each company section provides an investment overview, brief company synopsis, and questions/discussion points for the management teams. Make sure to bring our Primer with you to the conference.
Webcast Replay: CLICK HEREConference Primer Download: CLICK HERE |
Standing alone (STZ)
Constellation Brands reported FQ3 EPS of $2.83 vs. consensus expectations of $2.89, an uncommon miss. The losses from Canopy were $.18 per share in the quarter. Management lowered EPS guidance for the year to $11.20-11.60 from $11.20-11.60. Management expects price increases in F2024 will “be more muted” than this year. At the same time management expects inflation to be up HSD%. Contributing to the elevated level of inflation are hedging contracts renewing. Management expects next year’s beer operating margins to be even with this year.
Management lauds market share gains when discussing the slowdown in sales growth for the beer business. In an environment without a high level of consumer inflation, share gains at the expense of margins would not be well received. The same applies in a highly inflationary environment, especially when the competition is raising prices to cover costs. Management is standing apart from just about every CPG company by not trying to recoup margins lost to cost pressures. Instead, the company is lowering the level of price increases as costs increases pick up the pace.
We are removing Constellation Brands from our Long list. I was wrong to expect management to accelerate price increases in F2024. With the dual share class collapsing I thought management would be more likely to raise prices above historical precedent to cover significant cost pressures in the industry. Even at our lower than consensus estimates the valuation is attractive relative to its best in class organic growth peers in CPG. Modelo Oro’s national launch in March will likely drive an inflection in POS trends and a positive catalyst.
For more details please see our separate note.
Everyone is getting fries with it (LW)
Lamb Weston reported FQ2 EPS of $1.28, topping consensus expectations of $.74. Sales grew 27% with price/mix up 30% and volumes down 3%. Traffic to QSRs, casual dining, and full-service restaurants all improved sequentially in the quarter, but the latter two channels were down compared to the prior year. Retail demand remained solid and management mentioned that licensed restaurant branded fries sold at retail remained strong. The fry attachment rate even improved in the QSR channel. Foodservice segment sales grew 14% driven by a 25% increase in price/mix. Retail sales increased 34% driven by a 43% increase in price/mix. Global segment sales increased by 34% driven by a 31% increase in price/mix.
Gross margins expanded 950bps YOY and 550bps sequentially as price increases flowed through as well as benefits from customer and product mix. Manufacturing and distribution costs per pound remained up by double digits due to edible oils, raw materials, labor, and transportation. This year’s potato crop is below historical averages so the company sourced additional supplies that will incur higher costs. For next year’s potato crop, the company agreed to nearly a 20% increase in contract prices grown in the Columbia Basin.
Management raised EPS guidance to $3.75-4.00 from $2.45-2.85. Revenue guidance was raised to $4.8-4.9B from the high end of $4.7-4.8B. We are removing Lamb Weston from our Short Bias list. We were determining if the company’s sales to the foodservice channel would be weaker than projected due to our pessimistic view of food away from home priced above QSRs. The lower potato yields will likely lead to disciplined pricing for the industry over the next year.
Our updated position monitor:
A signal from the FDA? (PRGO)
CVS and Walgreens said they plan to offer abortion pills following the FDA’s decision to allow retail pharmacies to offer the drug in the U.S. for the first time. The FDA finalized a rule on Tuesday allowing mifepristone, one of two drugs used in medical abortions, to be dispensed, but the pharmacies would have to decide whether or not to offer the pill. Mifepristone is used in combination with misoprostol. The former is used to stop the pregnancy while the latter is used to induce contractions that empty the uterus. The FDA dropped its long-standing rule that required patients to obtain the drug in-person at the health care provider. Medication abortion accounts for more than half of abortions in the U.S. The distribution will vary by state in the aftermath of the Supreme Court reversal of Roe v. Wade.
Perrigo is seeking approval for a prescription to OTC switch for Opill, a progestin daily birth control pill. The factors going into the decision to approve Opill are quite different than what was considered for mifepristone. However, the influence of the political environment since the reversal of Roe v. Wade can be seen in the FDA’s decision to reverse itself on the abortion pill.
