The other type of oil deflation (LANC, UTZ)
The overall PPI for food manufacturing decreased by 0.8% YOY in May, decelerating from a 1.8% increase in April. The PPI for fats and oils refining and blending decreased by 15.1% YOY, decelerating from an 8.9% decrease in April. Oils are used in numerous food products from chips, dressings, and frozen meals. It has had some of the highest levels of inflation in the food category and a margin headwind for companies including Lancaster Colony and Utz Brands.
May retail sales (ACI, KR)
Headline retail sales ex. autos increased by 1.0% YOY in May. Grocery store sales increased by 3.1% YOY in May, decelerating from 4.1% in April as seen in the following chart. The two-year average increased by 6.0%, decelerating 40bps sequentially. It was the lowest monthly growth rate for grocery stores since May 2021. Gasoline station sales decreased by 20.5% YOY, decelerating from -14.6%. Total food spending, both at home and away from home increased 9.5% in May, decelerating from 10.1% in April. Grocery store sales are slowing as food disinflation continues. The emergency SNAP benefit expiration likely contributed to the slowdown in the last three months as well.
Q1 competitive environment remains benign (KR)
Kroger reported FQ1 EPS of $1.51 vs. consensus expectations of $1.46. ID sales ex. fuel increased 3.5%, decelerating from 6.2% sequentially. The termination of the Express Scripts contract was a 1.5% headwind. Digital sales grew 15% with pickup growth of 11% and delivery growth of 30%. Store brands grew 4.9%, slightly outpacing branded sales growth.
Gross margins ex. fuel increased 21bps driven by store label mix, sourcing, lower supply chain costs, and the Express Scripts expiration somewhat offset by higher shrink and increased promotional price investments. Shrink is expected to continue to be somewhat of a headwind. The LIFO charge was $99M vs. $93M in the prior Q1. The competitive environment remains benign despite management saying there were some price investments in the quarter.
OG&A increased 13bps due to higher wages and Express Scripts deleveraging partially offset by sales leverage and cost savings.
Management guided ID sales to grow 1-2% for the year with underlying growth excluding the loss of Express Scripts of 2.5-3.5%. EPS was guided to $4.45-4.60 which includes a $.15 benefit from the 53rd week. Q2 was guided to the low end of 2-5% EPS growth guidance due to the high fuel margin comparisons ($.62/gal.) last year. Despite reporting EPS and SSS upside, gross margin expansion YOY, and maintaining guidance, shares declined 2.7% yesterday after the results. Disinflation, decelerating SSS, reversing fuel margins, and the concern that the multi-year run in elevated grocery sales is ending weighed on sentiment. Kroger has been managing through disinflation with slower growth, but deflation will be a more serious challenge. As sales continue to decelerate the price investments necessary will increase to limit further share losses.
DISTRIBUTOR SUPPORT (BUD)
AB InBev announced a support plan for its distributors. The company will provide financial assistance to independent wholesalers on an individual basis and provide an incentive payment for beer sold this year. The company will extend additional credit, reimburse distributors for fuel surcharges, and increase marketing spend this year. The company also said, “To all our valued consumers, we hear you. Our summer advertising launches next week and you can look forward to Bud Light reinforcing what you’ve always loved about our brand.” The financial support to the distributors will help, but it will not help sales this year. The challenge with just more advertising is that consumers are paying more attention than management gave them credit for and anything that does not seem authentic will not resonate and turn the brand around.
