Position Monitor Changes
We are making several updates to our position monitor reflecting changing risk/rewards, and incremental news.
Kimberly Clark (KMB) – We are moving Kimberly-Clark from our Short Bias list to our Best Idea Short list. Our concerns include commodity costs, pricing power, and the volumes necessary to leverage expense growth. After two years of gross margin contraction causing the EPS growth to be below target, below-the-line items are expected to be the reason for another sub growth in 2023.
Oatly (OTLY) – We are adding Oatly to our Short Bias list. Shares nearly doubled in January before pulling back on the news of a shareholder meeting to approve flexibility to raise additional capital. Oatly announced the sale of its manufacturing plants in Utah and Texas to Ya Ya Foods. The sale will reduce capital needs and reduce operational complexity. The company will still retain the oat base extraction, which management views as proprietary. A co-manufacturing contract involves a percentage fee, so product costs will increase in the near term. Taking over Oatly’s plants will not be seamless for Ya Ya Foods which operates a plant in Canada. Moving the company to a Best Idea Short will require a better sense for the expectations around the balance sheet. Management’s near term focus is improving liquidity which should be achievable, but it will result in slower growth and lower margins than previously outlined. SunOpta (STKL) is our preferred plant-based investment.
Lancaster Colony (LANC) – We are moving Lancaster Colony higher on our Long list reflecting an uptick in our estimates in both Foodservice and Retail ahead of FQ2 results. This Q is expected to be the first Q of gross margin expansion, but I think expectations are too low for the year.
Dealing with food inflation (GO)
Tipp Insights conducted a poll in early January that found that 44% of Americans named food as one of their top three concerns. Inflation was the number one concern, followed by food, and gas prices. 57% of the respondents said they have cut back on grocery purchases due to affordability. 76% of respondents said they have cut back on eating away from home, 53% said they buy store brands, and 38% said they shopped at bargain stores. Grocery Outlet sells natural, organic, specialty, and healthy food for 40-70% less than conventional supermarkets. Grocery Outlet is on our long list. The company has one of the longest runways of new store openings among consumer companies.
Higher minimums (KR, ACI)
Amazon is raising the minimum order size to get free Amazon Fresh deliveries. Grocery orders of less than $150 will now be subject to delivery fees for Amazon Prime members. Orders less than $9.95 will incur a $9.95 fee, orders between $50 and $100 will incur a $6.95 fee, and orders between $100 and $150 will incur a $3.95 fee. Currently, Prime members outside of New York City get free delivery on orders over $35 while in New York City the minimum size is $50. Grocery delivery is transitioning into the improve profitability (or lack thereof) phase and out of the customer acquisition and top-line growth at any cost phase. A drop in the competitive intensity from the venture capital funded and tech companies is a welcome development for the brick and mortar grocers.
