Gross margins remaining under pressure (PBH, KVUE, PRGO)
Prestige Consumer Healthcare reported FQ4 EPS of $1.07, slightly above consensus expectations of $1.04. Organic revenue grew 8%, accelerating from 1.8% sequentially.
- North American OTC grew 4.0%, improving sequentially from -1.7%. The segment’s largest growth category was skin care where growth was across brands including Compound W, Bourdeaux’s Butt Paste, and Nix.
- International OTC grew 33% excluding Fx, accelerating sequentially from +23%. Growth was driven by brands that were negatively impacted by the pandemic as well as continued strength for Hyrdralyte.
Gross margins contracted 200bps YOY, similar to FQ3’s contraction. Inflationary pressures and distribution costs were a 150bps headwind YOY. Management expects additional inflationary pressures in F2024 and gross margins are expected to be nearly 300bps lower YOY in FQ1. Management guided F2024 EPS to $4.27-4.32, below consensus expectations of $4.40. Q1 is expected to be approximately $1.00. Organic revenue is expected to grow 1-2%. The company is planning to exit certain private label categories that represent 1% of sales. Gross margins for the year are expected to be flattish, with some price increases but mostly cost savings in the out years recapturing the lost margins back to 58%. Prestige Consumer Healthcare’s portfolio is similar to a drugstore’s OTC business excluding the cough & cold business. The portfolio is still seeing inflationary cost pressure, but passing on higher prices has been challenging. Kenvue’s brands are often so dominant in their respective category they are household names. People refer to the category by the brand’s name like Band-Aid and Listerine. Prestige Consumer Healthcare has some household names like Dramamine and Nix, but the brands are in smaller categories. It has not been any easier to raise prices in the smaller categories compared to the larger ones with more competitors.
Passing on inflation (LANC)
Lancaster Colony reported FQ3 EPS of $.89 vs. the consensus estimate of $.93. Revenue growth of 15.2% was slightly above expectations while margins were lower. Pricing increased by 11.3% and volume/mix was up by 3.9%. Retail segment sales growth of 16% was driven by pricing/mix of 10% and volume of 6%. In Licensing Buffalo Wild Wing, Arby’s, Chick-fil-A, and Olive Garden sauces all drove volume growth. New York Bakery and Sister Schubert’s both gained share. Foodservice sales grew 14% driven by pricing and volume growth at several national accounts. Total Foodservice segment volumes increased by less than 1%, but excluding discontinued items sales volume grew by 4%.
Gross margins expanded 330bps with favorable pricing, improved supply chain, and higher volumes. Commodity cost inflation was 20%. The company continues to see high levels of inflation for raw materials and packaging. Pricing net of commodities was favorable compared to the prior year. While oils and eggs have come down recently, sweeteners are seeing cost increases. For Q4, the company’s retail sales will benefit from the licensing program as well as new product innovations. In Foodservice, the company will lap a $25M shift last year that pulled forward sales ahead of an ERP implementation. The company’s new Horse Cave production facility enables new products, additional capacity, and reduced third-party production – in other words, it is accretive to sales and margins.
Monster Margins to come (MNST)
Monster Energy reported Q1 EPS of $.38 vs. consensus of $.33. Sales increased 11.9% or 15.3% in constant currencies. International sales grew 21.9% in constant currencies. According to Nielsen for the 13 weeks ended April 22, sales in the energy drink segment increased 10.5%. Monster sales grew by 9.5%, NOS increased by 14.1%, Full Throttle increased by 5.5%, Red Bull increased by 10.6%, Rockstar increased by 3.7%, 5-Hour Energy decreased by 4.1%, and VPX Bang increased by 59.5%. In the latest 4-week sales data sales in the C-store and gas channel increased by 12.7% with Monster’s growth at 9.3%.
Gross margins expanded 170bps YOY, continuing to show sequential improvement, due to price increases, lower inbound freight costs, and lower aluminum can costs. Excluding the alcohol segment gross margins expanded 270bps YOY. Incremental price increases were taken in international markets in Q1. The company also raised prices on additional packages in the U.S. starting in Q1.
Operating expenses leveraged 50bps. Distribution costs were 90bps lower YOY. Selling expenses leveraged 20bps. G&A costs leveraged 10bps. A lower tax rate was due to an increase in stock compensation deduction. Gross margins have inflected positively after management exercised their pricing muscles long after peers. The company has 1,000bps of gross margins to recapture in a sector that still has one of the strongest growth rates in CPG.
Union voices opposition (ACI, KR)
The United Food and Commercial Workers International Union said it opposes the merger between Kroger and Albertsons. The union is the largest union representing grocery workers. The union said it was concerned about the store divestiture plan and the lack of information around it. The union had not previously taken a position. Kroger and Albertsons seemed to have predicted where the regulators would be in opposition. The companies did not seem to have prepared the unions for store divestitures. The unions are tasked with membership rolls, not merger synergies after all. Wage increases do not address all the concerns.
