Food manufacturing PPI (BUD)
The headline PPI increased 4.6% YOY in February, decelerating from 5.7% in January. “Over 80% of the February decline in the index for final demand goods can be attributed to a 36.1% drop in prices for chicken eggs.” Food manufacturing PPI decelerated to 5.7% YOY in February from 8.8% in January. February’s increase is the smallest since May 2021.
Taken together with February’s CPI report, CPG margins continue to expand and the gap between producer prices and consumer prices is the widest it has been in the current cycle.
The PPI for breweries increased 5.4% YOY in February, a deceleration from 6.3% in January. Producer prices remained flat sequentially. Breweries saw costs surge in March 2022, later than other sectors of food and beverages. That caused domestic brewers to implement price increases rapidly. Easing cost pressures should see price increases revert to historical 2% levels.
Feb. Grocery Store Sales (BJ)
Grocery store sales increased 5.8% YOY in February, accelerating 40bps from January. On a two-year average basis, retail sales accelerated by 20bps in February as seen in the chart below. Gasoline station sales decreased 1.9% YOY, the first decrease since January 2021. Gasoline sales have been a tailwind for food retailers that have used fuel to drive traffic. A reversal to a headwind will pressure the top line as food inflation moderates.
A slower pace to the same destination (BRCC)
Black Rifle Coffee Company reported Q4 adjusted EBITDA of -$11.4M vs. consensus expectations of -$8M. Revenue was slightly ahead of expectations while margins were lower. Revenue grew 30.3% in Q4. By channel: wholesale grew 140%, DTC decreased 8%, and outpost grew 34%. RTD doors grew 44.5%, while wholesale doors grew 306.5%. DTC subscribers decreased 6% from 2021.
Higher costs
Gross margins contracted 290bps to 31.5%. 190bps of contraction was due to RTD start-up costs. The company took price increases in the 2H and in Q1 which should lead to sequentially improving gross margins. Operating expenses increased by 1200bps. The company leveraged marketing expenses, but wages deleveraged 550bps. G&A expenses deleveraged 760bps due to corporate infrastructure spending including IT.
Lowering revenue expectations
Management guided 2023 EBITDA to $5-20M vs. consensus of $11.4M. Revenue for 2023 was guided to $400-440M, representing growth of 33-46% vs. consensus of $497M. The $80M reduction in 2023 revenue at the mid-point was attributed as follows: $40M for RTD resets from a slower ramp in 2022 and a slower ramp from resets at retail stores this spring. The Food, Drug, and Mass channel expectation was revised lower by $30M for bagged coffee and pods. The company will be more focused on Walmart but dialed back plans to expand into other national chains in 2023. Outpost revenue was lowered by $10M due to slowing the unit growth plans. Gross margins are expected to be between 36-37%.
Management expects revenue growth to accelerate in 2023 while achieving positive EBITDA. For the first time in several quarters, management’s guidance appears reasonable. Achieving the same EBITDA target in 2023 will be based on lower revenue targets and will be easier to execute. Black Rifle Coffee is on our long list as an early stage growth company with tremendous upside over a long duration.
Through the worst? (OTLY)
Oatly reported Q4 adjusted EBITDA of -$60.5M, $2M better than expectations. Sales and gross margins were better than expectations. Revenue grew 5% in Q4 or 14% in constant currencies. In EMEA oat milk sales growth of 12% outpaced plant based milk sales growth of 4% in Q4. In the Americas, Oatly’s sales growth of 9% lagged total oat milk sales growth of 23% and total plant based milk sales growth of 12%. The company’s New Jersey plant began producing in Q4, which when fully ramped up will increase capacity by one-third. The Dallas plant is targeting commercial production in 2024-25. In Asia, Oatly’s volumes increased 22%, but price/mix decreased 15% for constant currency revenue growth of 8%.
Gross margins were flat YOY. In EMEA, Oatly will leverage its production by expanding into adjacent markets. In the Americas, the company expects to see margin improvement with the outsourcing of production and the New Jersey plant coming online. The company increased marketing spend in Asia to 20% in Q4 from mid-teens% to support growth.
Oatly guided revenue growth in 2023 to a range of 23-28% growth in constant currencies. Gross margins are expected to improve sequentially throughout the year to the high 20% range from 16% in Q4. Capex is expected to be between $180-200M. Management believes the progress it forecasts will result in positive EBITDA in 2024.
Oatly announced some steps taken to improve its balance sheet. The company has entered into private agreements with investors to sell $300M of principal amount of 9.25% convertible notes due in 2028. The notes will be convertible at an initial conversion price of $2.41, representing a 17% premium for the common shares. Oatly also renewed its credit facility for 3.5 years. In addition, Oatly entered into a commitment letter for a $125M secured term loan B with an initial 7.5% rate. The company has numerous challenges in each market, much more than what a growth stock typically has. After a near disastrous 2022, the company appears to be positioned to see improvement off of a low base. Oatly is on our short bias list.
It’s a beer (STZ, BUD)
A federal jury found that Constellation Brands’ production of hard seltzer with the Corona and Modelo brands does not violate the licensing agreement with AB InBev. The eight person jury deliberated for an hour before returning their verdict. AB InBev filed the lawsuit against Constellation Brands in February 2021 alleging misuse and misappropriating the trademarks for hard seltzer, which it argued was not a beer. The licensing agreement defined beer as “beer, ale, porter, stout, malt beverages, and any other versions or combinations of the foregoing, including non-alcoholic versions of the foregoing.” AB InBev said it was disappointed with the verdict and is evaluating its options. The federal and state governments have treated hard seltzer as a beer for taxation and classification purposes. AB InBev does not help its case by using the Bud Light brand to sell a hard seltzer. The lawsuit seemed to signal what management thought of the future growth of hard seltzer at the time.
