Food at home CPI (WMT)
Food at home CPI increased 7.1% YOY in April, decelerating from 8.3% in March. April was the eighth consecutive month of disinflation. The two-year average decelerated 20bps from March to 9.0%. If the two-year average continues at the current rate food at home inflation will be below 5% by the summer.
Meats, poultry, fish, and eggs CPI increased 2.8% YOY in April, decelerating from 4.3% in March. Egg inflation has slowed from +55% YOY in February to +21.4% in April. The meat category led food inflation on the way up and on the way down. Fruits & vegetables CPI increased 2.0% YOY in April, decelerating from 2.5% in March. Alcoholic beverages and sugar & sweets were the only sub-categories with accelerating rates of inflation in April. The perimeter of the grocery store will be deflationary in the 2H of the year, leading the rest of the grocery store.
Opill approval (PRGO)
The FDA panel voted unanimously to recommend an Rx to OTC switch for Opill. The company said, “While the FDA will be scrutinizing this application, there are over 35 independent organizations voicing support of Opill.” A decision by the FDA is expected in Q3. If approved shipments would likely start in 2024 and the company has estimated first year sales of $100M. Our revenue estimate is between $100-200M. Perrigo would be the exclusive OTC supplier for three years. Opill is currently not reflected in our estimates or consensus estimates.
Swapping into higher margin (STKL)
SunOpta reported Q1 EPS of $.05 vs. consensus of -$.02 and $.01 last year. Total revenue growth was up 0.4% from the prior year.
Plant-based revenue grew 9.3% with pricing up 10.2% and volume down 0.9%. Plant-based milk grew 25% with volume growth of 6%. Oat milk grew 33%. Coconut milk was also very strong and soy milk grew LDD%. Broth revenue decreased by 29% due to the exiting of some businesses in order to free up capacity for plant-based milk. Three of the company’s top four customers had revenue growth of 40% or more due to their growth, as well as SunOpta, winning more of their business. The tea business also was said to have strong revenue and volume growth. SunOpta’s own brands grew 59%, the co-manufactured business grew mid-teens, and private label milk grew 31%.
Fruit-based revenue decreased 9.7% with pricing up 1.3% while volume/mix decreased 11.0%. Lower frozen fruit demand was the drag as it compared to a one-time order last year.
Gross margins expanded 80bps YOY including 260bps of startup costs at the new plant. Plant-based segment gross margins expanded by 60bps, excluding the Texas plant start-up costs gross margins expanded by 470bps. Divesting the sunflower business was a 170bps benefit. Pricing and mix drove the remainder of the improvement. Fruit-based segment gross margins expanded 80bps due to strong growth in fruit snacks partially offset by a higher mix of lower margin bulk frozen fruit sales. Adjusted EBITDA expanded 450bps and grew 50%. Leverage at the end of Q1 was 3.6x.
Management reaffirmed their outlook for revenue growth between 7 to 12% and adjusted EBITDA growth of 16 to 23% YOY. Management made several decisions to replace lower margin businesses in plant-based ingredients and in a packaging line. Management chose finished goods as well as plant-based milk, in both cases preferring higher margins. With the Texas plant and Modesto expansion providing more capacity in the 2H, what is lost in a trade-off will be difficult to be felt.
Targeting volumes (AD-NL)
Ahold Delhaize Q1 EPS of €0.61 vs. consensus of €0.56. The company reported better SSS and operating margins in the U.S. while European operating margins were slightly lower. SSS ex. fuel in the U.S. increased 6.2%, slowing from 9.3% in Q4. In Europe SSS ex. fuel increased by 6.1%, led by Eastern Europe with double-digit growth in each country. Online sales increased 11.9%.
Overall operating margins contracted 20bps with 40bps of expansion in the U.S. mostly offsetting pressure in Europe. The U.S. benefited from sales leverage and lower logistics costs. The pricing environment in the U.S. was described as rational, with consumers seeking more private label. Vendors were also described as growing volumes being a top priority with more promo and trade funds coming into the system. In Europe, operating margins contracted 70bps due to energy costs and strikes in Belgium. A quiet report from Ahold only notes that vendors will be supporting more promotions in the future to improve volume trends.
