Grocery inflation by category (WMT)
Food at home CPI increased 11.3% YOY in January, but there is a widespread among the categories in the grocery stores. The non-alcoholic beverage category is seeing the highest level of inflation at 13.9% for the four week period that ended February 12. The overall grocery category had inflation of 10.1% YOY, decelerating from 10.8% sequentially. The snack category saw inflation of 10.8% in the same period, decelerating from 11.7% sequentially as seen in the following chart. At the low-end alcoholic beverages had an inflation rate of 2.9%, while meat and produce were at 3.3%. Recently, the center of store items are generally seeing higher rates of inflation than the departments on the perimeter of the store selling commodities like produce and meat. Walmart has been the most vocal about pushing back on price increases, but the sales mix may have more to do with a grocery chain’s level of inflation.
Lapping the surge in gas prices (BJ, CASY)
The national average gasoline price has tracked the previous year during the first two months of 2023 as seen in the chart below. The national average price for regular gasoline was $3.45 per gallon, flat to a month earlier, but 17% lower YOY. We are beginning to lap the beginning of the price surge in gasoline last year. According to the EIA gas demand increased from 8.9 million b/d to 9.1 in the last week of February. At the same time, total domestic stocks decreased by nearly one million barrels to 239 million. Higher demand and lower inventory could drive prices higher again like in 2022. The average gasoline price in California is ~43% higher than the national average. The average price in California has increased 6% from a month ago but is 11% lower YOY.
In the quarter that ended January 31, Casey’s General Stores reported same store gallons sold were down 0.5% YOY. Fuel gross profit increased 10.4% with gallons sold up 3.7%, a $.024 per gallon or 6.3% increase in fuel gross profit to $.407 per gallon.
Casey’s General Stores guided same store fuel gallons to be up or down 1% for the year, down from flat to up 2% previously. In February, fuel gross profit has been around the mid $.30 per gallon range, down from the quarter just reported. The warehouse clubs and grocers have benefited from strong fuel sales and higher than typical fuel margins. BJ’s Wholesale Club is hosting an analyst day today. According to our calculations, fuel gross profit growth accounted for 60% of total gross profit growth during the first three quarters of F2023.
Everybody wants the sauce (SOVO)
Sovos Brands reported Q4 EPS of $.19 vs. consensus expectations of $.16. Upside was driven by better-than-expected sales of Rao’s and sales leverage. Revenue grew 38.5%, with organic growth of 28.4% driven by pricing of 12.4% and volume of 16%. The extra week contributed 10.1% to the top-line growth rate. Rao’s grew 56% YOY, with organic growth of 44.6%. Rao’s saw strong growth in sauce as well as new product categories. Noosa sales grew 12.5%, with organic growth of 4.3%. Michael Angelo’s sales decreased 0.3%, with organic growth of -7.1%.
Adjusted gross margins contracted 220bps due to inflationary cost pressures. Adjusted EBITDA margins expanded 10bps due to sales leverage.
Management guided F2023 revenue to $900-925M vs. consensus expectations of $888M. For EBITDA, management guided F2023 to $130-135M vs. expectations of $127M. The sale of Birch Benders removes a drag on growth and profitability as well as strategic questions over acquisitions. Rao’s sales accelerated in Q4, but Noosa and Michael Angelo’s decelerated. The question isn’t whether Rao’s is the next billion dollar brand (from $.5B currently), but what about the other brands? Sovos Brands is on our long bias list. There is a great brand and value to be unlocked, but the path is complicated by the other brands.
