April PPI (KR)
The PPI for food manufacturing increased 1.6% YOY in April, decelerating from 4.8% in March. April was the smallest increase in producer prices since January 2021. On a two-year average basis, the increase was 8.0%, a deceleration from 9.6% in March. The gap between the CPI for food at home increase and the PPI for food manufacturing increase remains historically wide leading to significant margin expansion for CPG companies.
The PPI for supermarkets decelerated from 15.8% in March to 13.1% in April. Grocery stores did not experience the elevated levels of inflationary cost pressure until much later than other sectors of consumer staples. This leaves the sector seeing elevated cost pressure while pricing is quickly disinflating and the consumer continues to experience more headwinds to their incomes.
Unfavorable optics in Q1 (UTZ)
Utz Brands reported Q1 EPS of $.11 vs. consensus expectations of $.10. Organic sales grew 4.0% with price of +9.7% and volume/mix of -5.7%. The declines in volume came from a comparison to 11.3% growth in the prior year as well as the SKU rationalization program which was estimated to have had a -4% impact. According to the scanner data retail sales grew 9.4% in the 13-week period that ended April 2. Power Brands sales increased 9.8% while Foundation Brands sales increased 6.9%. The two largest product sub-categories - potato chips grew 16.5% and pretzels grew 19.1%. Tortilla chips grew 35%.
Adjusted gross margins expanded 50bps due to higher prices, an improved mix, and productivity initiatives somewhat offset by higher commodity costs and labor. The IO shift impact in the quarter was estimated to be a 90bps headwind to gross margin with a similar benefit to SD&A. The closure of its Birmingham plant necessitated by the costly retrofit costs will be shifted to other plants. The company will incur cash closure costs of $6.5M for severance and closing, production. Non-cash asset impairments will be between $8-11M. Savings are not expected to be material until next year. Adjusted EBITDA margins expanded 80bps to 11.5%.
Management reaffirmed organic revenue growth guidance of 4-6%. Adjusted EBITDA is now expected to grow 7-10%, up from 6-10% previously. Gross margin expansion is expected to more than offset higher marketing expenses. Inflation is expected to be +HSD%. Expectations for Q1 were ahead of the reported results due to strong competitor growth in Q1 at PepsiCo and Hershey. Although most of the worsening volume trends were due to SKU rationalization, the optics are not favorable as price increases are decelerating. Gross margin gains also narrowed from +220bps in Q4 to +50bps despite SKU rationalization and pricing. The leverage remains high at 5.1x which is not an outperforming style factor in Quad 4. Utz Brands is on our long list due to gross margin recovery, secular growth trends, company specific growth drivers in distribution, and valuation upside.
A little stumble on the way to the ball (WEST)
Westrock Coffee reported a Q1 loss per share of $.13 vs. a consensus estimate of -$.01. Revenue and margins were below expectations. The transition to a new ERP system resulted in two weeks of production downtime in the company’s roast and ground coffee business. The company’s single serve production also encountered downtime in the quarter when new equipment challenges that are now resolved. Total revenue increased 10% YOY driven by the 44% growth in single cup volume while SS&T was a drag and the pass-through of higher green coffee prices. Beverage Solutions revenue grew 22.1% while EBITDA fell 19%. SS&T sales decreased by 36%. EBITDA decreased $1M.
Gross margins contracted 400bps. The lost production cost the company $4M of profit in the quarter. Adjusted EBITDA fell 25% or $2.9M YOY. Management reaffirmed EBITDA guidance of $66-75M, representing growth of 10-25% and bracketing the consensus estimate of $70M.
The challenges the company has recently faced do not have any correlation to the Conway facility coming online, but as a new company, they will negatively impact investors’ perceptions. The Conway facility, the new capacity, and capabilities are the future of the company while an ERP transition and new equipment downtime are rather minor and in the rear view mirror.
Q1 shift to wholesale (BRCC)
Black Rifle Coffee Company reported 27% revenue growth driven by the wholesale channel.
- DTC sales decreased by 4% with a decline in membership as the company pulled back on digital advertising.
- Wholesale revenues grew 82% YOY driven by distribution growth (16,000 doors).
- Outpost revenues grew 21% with the number of outposts reaching 16 company owned and 11 franchised.
Gross margins contracted 230bps due to higher coffee costs and RTD raw materials from additional capacity. The company also incurred 215bps of additional costs from the start-up of new capacity additions. Adjusted EBITDA margins were -6.1% compared to -9.6% last year. Operating expenses improved by 575bps due to sales leverage. Marketing expenses decreased 380bps YOY due to a reduction in spending while growth in wholesale required less spending. G&A expenses decreased by 135bps due to sales leverage.
Management reaffirmed guidance for achieving profitability in 2023 and revenue to be between $400-445M, gross margins to be between $36-37.5M, and EBITDA between $5-25M. Black Rifle Coffee Company is on our long list, but its style factors being out of favor in Q4 limit our expectations over a trend duration for outperformance. The company has significant growth opportunities in different channels, but in the near term growing pains are holding back margins.
