Now execution (PRGO)
Perrigo reported Q1 adjusted EPS of $.45 vs. $.33 last year and consensus expectations of $.43. The adjusted EPS includes $.15 of one-time items including $.10 for product recalls and $.05 for HRA transition sales returns.
Sales acceleration – Sales grew 13.0% in constant currencies with organic net sales growth of 6.4%, accelerating sequentially from 1.5%. CSCA – Constant currency sales growth was 7.6%. Upper Respiratory sales increased 1% driven by Nasonex and other allergy products. The Latin American business divestiture was a 1.8% point headwind. The OTC product recall and higher prevalence of cough/cold and flu were also headwinds. Lower supply availability was a $20-25M foregone sales opportunity. Management expects to be back in stock for the fall. CSCI – Constant currency sales growth was 23.6% while reported sales growth increased 14.7%. Upper Respiratory sales increased 35.9% in constant currencies, with limited impact from out of stocks.
Margins expanding further – Overall gross margins expanded 400bps in Q1, improving from +350bps in Q4. The product recalls and HRA distributor transition had a -130bps impact on gross margins. Overall operating margins expanded by 200bps.
Outlook reaffirmed - Management reaffirmed the EPS range of $2.50-2.70 and organic growth of 3-6%. Murray Kessler also announced his intention to retire after five years as CEO, about 14 months before his contract was scheduled to end. When he was appointed as CEO he was Perrigo’s third CEO in one year. Murray Kessler’s tenure included a tax lawsuit looming, the sale of the generic drug business, the major acquisition of HRA, a global pandemic and its impact on the supply chain, a national infant formula shortage, and the transition to a consumer healthcare company. He leaves on a much quieter note in healthy industry conditions, with Damocles' sword removed, the industry following his strategic lead, and the company benefiting from several growth tailwinds. With the company’s leverage, the future direction of the company is locked into executing the strategy and deleveraging. Going forward the company would benefit from a CEO with an operational background. For more detail please see our separate note.
Q1 flywheel (GO)
Grocery Outlet reported Q1 EPS of $.27 vs. the consensus estimate of $.23. Upside was driven by better sales and margins. SSS increased 12.1%, decelerating from 15.1% in Q4 but on a two-year stacked basis improved over 300bps. Transactions increased by 7.9% while average transaction size increased by 3.9%. Management is not expecting a change in sales from a decrease in SNAP benefits based on recent historical trends.
Gross margins expanded 90bps, improving from 70bps of contraction in Q4, driven by favorable buying and strong execution. Grocery Outlet appears to be benefiting from the supply chain mostly returning to pre-pandemic levels which is leading to more opportunistic purchases, spinning the flywheel of higher sales and higher margins. SG&A leveraged by 10bps. EBITDA margins expanded by 100bps.
Management raised EPS guidance from the previous range of $.94-.99 to $.96-$1.00. SSS are now expected to be +5-6% from 4.5-5.5%. Gross margins are now expected to be 30.7% in Q2 (40bps lower sequentially) and for the full year. The gap between Grocery Outlet’s SSS and its food retailer peers is widening further as food dis-inflates and the company’s value offering resonates. Grocery Outlet also has the largest new store growth opportunity in food retail.
Build up for the summer (CELH)
Celsius Holdings reported Q1 EPS of $.40 vs. the consensus of $.19. The upside was driven by better than expected sales and cost leverage. Sales grew 95% YOY and 46% sequentially. North American revenue grew by 101%. Distribution growth with PepsiCo has been a significant driver of growth with ACV reaching 93.4%, up from 55.7% in the prior year. Further shelf penetration has also been a tailwind with a five item per location increase to 13.6 in Q1. Inventory build of $20-25M in mixing centers added to sales growth. The company is trying to build up inventory levels ahead of the summer. International sales grew 15%, the slower growth rate benefited gross margins.
Gross margins expanded 400bps, boosted by lower can costs and sales leverage somewhat offset by higher freight and some inventory write-offs. Sales and marketing expense leveraged 540bps due to timing. G&A expense leveraged 100bps.
In the year ended March 26, Celsius was the largest dollar growth energy brand in the MULO+C scanner data. In the latest four weeks Celsius reached #3 in the energy drink market share of 7.5%. The company is also seeing success in non-measured channels with Pepsi’s distribution. Foodservice represented ~10% of PepsiCo revenues. Celsius has signaled its future margin upside by reaching 18% EBITDA margins early in its history while it was chasing 100% revenue growth. Traditional valuation measures are not of much use for a growth opportunity like Celsius – something PepsiCo understands.
Beer shipments fall (STZ)
Domestic taxes paid for beer shipments from U.S. breweries decreased 2.3% YOY in March according to the Beer Institute and Alcohol and Tobacco Tax Trade Bureau. Domestic brewers shipped 14.9M barrels, a decline of 353,488 barrels. YTD shipments decreased by 0.8% compared to the first three months of 2022. January declined by 4.4%, but February increased by 5.1%. Sales to retailers decreased 4.9% in March likely leading to lower shipments from breweries in April.
Beer imports increased 6.9%, driven by imports from Mexico up 12% YOY. Mexican beer imports are up 13.3% from 2019. California had the largest YOY decline in shipments in March at -18.9%. California is Constellation Brands’ largest state for beer. The rainy weather in California has weighed on results in Q1.
