Hedgeye Staples will host a pre-IPO Black Book today at 2 PM ET to review Kenvue and its plans to go public.
EVENT DETAILS:
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Johnson & Johnson is spinning off Kenvue, its consumer healthcare division, through an IPO next week. The $3B+ IPO would value the company at ~$40B. Kenvue would be the world’s largest pure-play consumer health company in the $369B industry. The company competes in self-care, skincare & beauty, and essential personal care products. Kenvue owns well-known brands, including Tylenol, Band-Aid, Listerine, and Neutrogena, among many others. Ten of its brands each had $400M or more in sales. Seven of its brands are market share leaders in their respective categories globally.
Lesson learned from the first week of earnings season.
Stock prices are reacting positively to a strong print thanks to January and aggressive pricing; the guides have been less relevant.
On Friday, BLMN and BJRI were the two best-performing restaurant stocks, up 12.6% and 5.0%, respectively. Both companies are below-average casual dining companies that had strong quarters when they should have given industry sales trends. Both companies' guides to slowing trends and nothing in the go-forward outlook would suggest that they will emerge from the bottom of the industry basement when looking at margins and returns. Yet the market rewarded them with very strong relative performance.
BJRI reported a 1Q23 EPS, revenue, comp, and margin beating estimates. The company cited choppiness in early 2Q23, guided to DOWN 0-2% traffic. It's hard to come away with the premise that that business will improve from here. BJRI's restaurant margins are improving, but they should be on 9% SSS and price making up 7% of that! Even after the significant improvement in margins, the company still operates with some of the lowest margins in the industry, making accelerating unit growth in 2024 a positive? BJRI is trying something unusual for a sit-down concept, and that is allowing guests to order at a counter before they’re seated. CEO Greg Levin said on the earnings call last Thursday that the chain is testing the quick-service-style (order before you sit down) option in several locations to see how it affects service speed. Surprisingly, the chain has found that guests who order this way aren’t necessarily looking to get in and out quickly. “They still spent basically an hour at BJ’s,” often ordering a second beer or other items, he said. That suggests they chose BJ’s for the experience or food but enjoyed the convenience of ordering at the counter.
The same story with BLMN. They reported 1Q23 earnings, revenue, comp, and margins beating estimates. The company highlighted a significant improvement from 4Q22, even after "factoring in a 330-basis-point favorable impact on 1Q23 traffic from the lapping of Omicron and unfavorable weather. Traffic at the core Outback concept did improve from -8.7% in 4Q22 to -1.5% in 1Q23, or 130bps below the Knapp track. Looking into 2Q23, traffic will accelerate to the downside at 4% or more. highlighted the continued improvement in traffic and average check; also noted stickiness of off-premise sales; The company's 2Q22 adjusted earnings per share to be between $0.62 and $0.67, below analysts estimates as YoY comparisons will become more difficult QoQ. Despite this, the company reaffirmed its FY targets because this growth will accelerate aging in 2H22.
What is the current state of the consumer? We have differing opinions:
CMG is bullish
"...Yeah, actually, two things happened for us, one, the higher-income consumer continued to come, and arguably came at a little bit faster pace from a frequency standpoint. And then we did see some, I would call it, recovery in the lower-income consumer, still not all the way back to where it was, call it, a year ago, but an improvement from where it was over the last six months. So, we’ve seen nice improvements across all of our income cohorts, and we continue to see great strength in the higher income. CEO Brian R. Niccol
“...We kind of like the environment we’re in right now, where consumers have jobs. They have money. They’re visiting restaurants, and the inflation that we’re seeing is pretty modest.” CMG CFO Jack Hartung
MCD is bearish
"...we are seeing a slight decrease in units per transaction. So, things like did someone adds fries to their order, how many items are they buying per order, we're seeing that go down in most of our markets around the world slightly, but it's still going down…we are seeing, in some places, resistance to pricing, more resistance than we saw at the outset. So I think all of those things are reflective of, again, a more challenging macro environment." - McDonald’s CEO Chris Kempczinski
"...if you look at the U.S., we certainly believe we're on a downward trend, although inflation remains elevated. So if you look at commodity inflation on the food and paper front in 2022, we were in the mid-teens level in the U.S. This year, we think it will be mid-to-high single digits. I think labor inflation will still remain elevated just on the back of a really continued strong labor market…by the end of the year, we're gonna be looking at the probably high single digit in inflation on a full year" - McDonald’s President Ian Borden
DPZ is on the fence
“...We’re going to have to continue to monitor real disposable income and the trends and how that’s evolving. Because what you’re seeing right now is inflation is on a downward trend, but wage growth seems to be holding up the U.S. economy. I think it cuts a little bit differently depending on income strata.” ,” Domino’s CFO Sandeep Reddy.
