Adding As Best Idea Long (TAP)
We are adding Molson Coors to our Best Idea Long list. AB InBev and Molson Coors combined have more than 60% of the domestic market share of beer. The two brewers have lost the higher end of the beer segment to craft beer. They have also failed to make inroads with the growing Latino population. Since the pandemic began, younger consumers have adopted hard seltzers and RTDs potentially switching consumption habits for decades to come. Demographics and premiumization are secular headwinds for the domestic big brewers.
With annual volume declines Molson Coors has sought out new partners for distribution to keep the network from entering a decremental margin cycle. Memorable marketing campaigns have often centered on market share wars, rather than growing the market. In this challenging backdrop, Bud Light committed a historic marketing fiasco of its own doing. Molson Coors is the key beneficiary with the new customers up for grabs as seen in the off-premise scanner data.
Our EPS estimates for the year are considerably ahead of consensus expectations. Driving our estimates are higher U.S. volumes and fixed cost leverage of a manufacturer budgeting for volume declines. The current valuation implies the company will not be able to hold onto the market share gains. We see a path for Molson Coors to build on the gains rather than give them back. We see 30% upside in the share price.
Our updated position monitor:
Tax surprise and decelerating trends (BJ)
BJ’s Wholesale Club reported Q1 EPS of $.85, in line with consensus expectations and below $.87 last year. Better than expected gross margins were offset by higher SG&A spending and an unexpected tax expense.
Total SSS increased by 2.0%, but ex. fuel increased by 5.7%. Food & sundries grew 8% while general merchandise and services fell 8%. Big ticket items were weak. Comp gallons were up YOY, but profit per gallon was lower. Of the company’s 6.8 million members, 1.5 million have transitioned to the new Capital One card with 75% activated. Digitally enabled sales grew 19% to roughly 10% of overall sales. Management expects comps in the 2H to be stronger than Q2 with inflation decelerating.
Gross margins expanded 100bps YOY, accelerating sequentially from +30bps, driven by improvements in merchandise margins from waning supply chain pressures (particularly diesel and ocean container rates) and moderating inflation. BJ’s own brand growth in food & sundries increased by 1% point to the overall own brand penetration. Gross margins are expected to moderate throughout the year. Management described the competitive environment as remaining fierce with increased promotional activity in Q1 and Q2. Inventory increased 4.8% YOY, but was lower excluding the perishable inventory related to the DC acquisitions. SG&A grew 8.5% YOY driven by increased labor and occupancy costs. SG&A spending was 50bps higher than expectations.
Management maintained their outlook for the year, “given the sustained strength in our grocery business and our gains in market share.” Comps are expected to be at the lower end of the 4-5% range. Yesterday’s share price decline likely reflected SSS not exceeding expectations, a more subdued Q2 outlook, and guidance embedding an acceleration in the 2H.
SNAP payment rollercoaster (WMT)
SNAP payments have had significant fluctuations since the pandemic outbreak as seen in the chart below. SNAP emergency allotments began in April 2020, soon after as the pandemic restrictions were implemented. The average monthly SNAP household benefit increased from $250 to $365. Another increase in the COVID-19 relief bill raised the benefit further to $479 in May 2021. The USDA’s Thrifty Food Plan boosted the average household payment to $493 in November 2022. The expiration of the Emergency Allotment in 32 states in March dropped payments to $342. There are 43 million people in 22.5 million households currently receiving SNAP benefits. Total SNAP payments in 2023 are expected to be $84B, representing 9.5% of grocery industry sales. 2023 will see a $30B or 300bps decrease in grocery industry support. The impact to date has been larger in discretionary than in staples. Walmart has the highest share of SNAP spending.
