Adding Celsius to the Long List (CELH)
Celsius is carving a niche in the growing energy drink category, but also bringing in new consumers. Celsius has aligned itself with healthy and better-for-you attributes that extend well beyond young consumers and the gym. Competitors are responding, but brand associations work against them and for Celsius. We see the niche becoming a significant portion of energy drinks. The PepsiCo distribution agreement and investment open more doors for growth and adds visibility to near-term results. The shares have recently pulled back after a legal judgment against the company for $83M over a breach of contract suit with a former marketing partner, the hip-hop artist Flo Rida.
The end of inflation is premature (LANC)
Lancaster Colony reported FQ2 non-GAAP EPS of $1.66 vs. consensus expectations of $1.67. Project Ascent expenditures were $.21 this quarter compared to $.24 in the prior year and are not included in the non-GAAP results. Overall revenues grew 11% with volumes measured in pounds falling 4%, or 2% excluding discontinuations. Retail segment sales grew 6% driven by New York frozen garlic bread, Buffalo Wild Wings sauces, Arby’s Horsey sauce, and Arby’s sauce products. Retail volumes decreased by 4% with about 1% of the decline coming from exiting less profitable product lines. Foodservice sales grew 19% due to price increases and volume growth at certain QSRs. Sales volumes decreased by 5% due to the exit of some less profitable SKUs.
Gross margins contracted 120bps. The math of price increases matching the cost increases in dollars is a 200bps headwind to margins. Higher egg costs were an additional headwind in the quarter. The company continues to see 20% inflation in raw materials (soybean oil) and packaging. Management has no intention to roll back pricing because inflationary pressures are continuing. A year ago raw material and packaging inflation looked to be 20% and a year later it still remains at 20% through the remainder of the fiscal year. Future +HSD% pricing plans are higher than where they had been due to forward visibility on costs. The Horse Cave expansion has been brought online and is on plan. Self-manufacturing compared to using co-packers will be a 100-200bps tailwind going forward.
SG&A expenses increased 1% YOY excluding the Project Ascent expenses. Retail segment operating margins contracted 110bps while foodservice operating margins expanded 220bps.
Lancaster’s input basket has experienced higher inflationary pressures than the overall consumer staples basket. The inflationary pressures are not going away in the next couple of quarters either, but management now has pricing plans that have caught up to the higher costs. The company’s underlevered balance sheet is a strategic decision away from creating additional value. Lancaster Colony is on our Best Idea Long list due to the acceleration in sales from the capacity expansion, upside in margins over the next two years from pricing and other initiatives, and the long term visibility from Chick fil A's compounding growth.
Price freeze thawing (L.CN)
A price freeze put in place by Canadian grocers over the holidays is ending next week. In the fall, Loblaw announced a price freeze on hundreds of its store label products. Last month Metro said it had received more than 27,000 requests from suppliers to raise prices by more than 10%, more than three times the normal level. Frito Lay raised its prices by more than 10% in Canada. The ensuing standoff with Loblaw resulted in no snack shipments for weeks. Inflation is not the same across categories and several categories will see notable increases as seen below. Produce prices are at the top of the increases due to the recent torrential rainfall in California.
