Traffic Champion (GO)
Grocery Outlet reported FQ4 EPS of $.25, above consensus expectations of $.23. The upside was in higher revenue and better expense growth. SSS increased by 15.1% with transactions up 10% and transaction size up 4.6%. That compares to SSS growth of 15.4% in Q3 with transactions up 7.9% and transaction size up 6.9%.
The company revised its definition of non-GAAP measures to no longer exclude the impact of non-cash rent expense (the difference between straight line and cash rent) and the provision for accounts receivable reserves (non-cash changes in reserves for IO notes and A/R). The new definition lowered Q4 EPS by $.03. For 2022 the revised definition lowered EPS by $.08. Non-cash rent totaled $7M in 2022 while the A/R provision totaled $4.3M.
Gross margins contracted 70bps due to cost pressure on commodity items. SG&A leveraged 90bps due to store expense leverage offsetting higher incentive compensation.
Management’s guidance for revenue and EBITDA reflects the new definition of non-GAAP results. Management issued 2023 EPS guidance of $.94-.99 vs. consensus expectations of $1.14. SSS were guided to 4.5-5.5% with Q1 expected to be +10%. Grocery Outlet expects to open 25-28 new stores in 2023 due to construction delays. Management expects the pace of new store openings to accelerate to 10% annually in the 2H and for ~47 new stores to open in 2024.
Grocery Outlet’s traffic growth is well above the food retail competition, benefiting from consumers looking to stretch their budgets in an elevated inflationary environment. While the change to non-GAAP results makes the EPS and EBITDA valuation more expensive, it does not change cash EPS and EBITDA. Grocery Outlet’s store base is one of the least mature at 1/10 the current potential. The visibility to margins from the franchised model, the double-digit annual store growth, and positive SSS growth drivers deserve a premium multiple.
Still catching up (MNST)
Monster Beverage reported Q4 EPS of $.57, below consensus expectations of $.63. The company has missed consensus EPS expectations in four of the past five quarters. The miss was from lower revenue and slightly lower margins. Excluding Fx and CANarchy EPS would have been $.64. Total revenue grew 6.2% and in constant currencies grew 11.9%. The energy drinks segment grew 8.3% in constant currencies. Strategic brands grew 49.4% in constant currencies. International sales grew 22.9% in constant currencies. The latest 6% price increase in the U.S. was implemented on September 1 and in some international markets during Q4.
Nielsen reported that the energy drink category grew 13.1% in the four-week period that ended February 11 in the MULOC channel. The company’s energy brands grew 12.1% with Monster up 11.3%, Reign up 15.6%, NOS up 20.6%, and Full Throttle up 1.3%. In comparison, Red Bull grew by 11.5%, Rockstar grew by 3.4%, 5-Hour decreased by 2.4%, and Bang decreased by 47.1%.
Gross margins contracted 210bps YOY but expanded 50bps sequentially. Excluding CANarchy gross margins were 70bps better. Higher ingredient costs, other input costs, secondary packaging materials, increased co-packing fees, sales mix, and increased logistical costs were headwinds to gross margins. Operating margins contracted 290bps YOY due to G&A expense deleverage.
The company also announced a 2:1 stock split that will start trading split adjusted on March 28. Monster repurchased 2.3 million shares at an average price of $89.10 per share during Q4.
Monster Beverage was late to pull the price lever to offset COGS inflation. Management sees relief on several costs in 2023. Some higher costs like cans will remain until the higher cost supplies are depleted over the next couple of quarters. Management continued to express commitment to raising prices further to recover gross margins. The inflection in margins is coming, the innovation pipeline remains robust, and global market share gains continue, but we’re stuck with the drag from alcohol in 2023.
Investor Day (PRGO)
Perrigo held an investor day outlining its top-line and margin expectations for 2023, the next three years, and beyond.
Annualizing acquisitions, cough/cold recovery, and infant formula capacity enhancement provide faster top-line growth in 2023. In the following two years, the innovation pipeline and the pricing/SKU rationalization will be significant drivers. SKU rationalization brings its own risks for a company like Perrigo that by the nature of its diverse customer base requires a plethora of SKUs. However, management outlined the minimal impact on margins from an incremental SKU. Acquisitions will not be a driver in the foreseeable future as management stated their commitment towards leverage reduction below 3x by 2025.
Management guided EPS in 2023 to $2.50 - $2.70 vs. consensus expectations of $2.78. EPS guidance includes a one-time distribution transition cost of $.16-.18. (One-time costs are generally excluded from non-GAAP results, bringing guidance in line with previous expectations.) Revenue growth is expected to be between 7-11%, above consensus expectations of 5.9% growth. Organic growth is expected to be 3-6%. The longer-term guidance is above the previous “3%-5%-7%” plan with low-mid single digit top-line growth, mid-teens EBIT growth, and mid-high teens EPS growth.
Several macro factors did not go Perrigo’s way over the past three years. Management’s 2023 EPS guidance provides a credible commitment and the first step of recovery. Perrigo’s near-term outlook remains a show-me-story with a focus on execution. With depleted inventory levels at retail for Cough & Cold, a better outlook for Oral Care from lower freight rates, additional Infant Formula production capacity (better for revenue growth and margins), and continued synergies from HRA, Perrigo's 2023 is set up to put the challenges of 2022 behind. The three-year outlook is well above expectations and reflects management’s confidence in both recovery and growth.
Adding to the Long Bias list (BUD)
We are adding Anheuser-Busch InBev to our Long Bias list. The beer industry has moved to protect margins in the wake of COGS inflation through aggressive price increases. The beer category is showing signs of stabilizing volumes. Management’s price increases are offsetting the pressures, with some loss of volume – a tradeoff the company is used to making.
The company has reduced leverage from more than 5x at the outset of the pandemic to 4x. The EV/EBITDA multiple has not changed. Relative to the market BUD is an outperformer in Quads 1 and 4. Its strongest absolute performance historically has been in Quad 1. More focus on international growth and a flipped Fx outlook would benefit AB InBev. We will vet whether the company can recover margins after years of contraction and enter a positive earnings revision cycle.
