We are hosting our monthly Consumables Digest call today @ 12:30 PM ET.
Event Details:
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We will discuss current topics for K, KLG, HSY, PRGO, and KVUE. We will review the pushback and feedback from our recent Black Books, highlight top client inbounds, and recent takeaways from management calls. We will also take live questions but will keep our call's length to 30 minutes.
“Steady as she goes” (COST)
Costco reported FQ4 EPS of $4.86 vs. consensus expectations of $4.79. Total comps increased by 1.1% and increased by 3.8%, adjusted for gas and Fx. U.S. SSS increased by 0.2%, but ex. gas grew by 3.1%. Traffic increased 5.2% worldwide and 5.0% in the U.S., with average ticket down 3.9% worldwide and down 4.5% in the U.S. E-commerce decreased 0.6% ex. Fx, and improved sequentially due to less of a drag (-5% in Q4 vs. -20% in Q3) from big-ticket items. Food & sundries, and fresh food outperformed, while some non-food categories were the offsets. Membership fee income grew 13.7% or 7%, adjusting for the extra week. Renewal rates were at 92.7%, up 10bps in the U.S. and Canada, and worldwide was 90.4%, down 10bps.
Gross margins expanded 42bps or 16bps ex. gas. Core merchandise margins expanded 28bps ex. gas. LIFO was a 28bps tailwind ex. gas with a charge of $30M this year compared to $223M last year. Ancillary gross margins were flattish, excluding the gas business. Shrinkage has increased by only a couple of basis points in recent years and in the past year, it has only increased by less than one basis point. SG&A deleveraged by 43bps or 21bps ex. gas.
Management previously estimated inflation during Q3 was 3-4%; in Q4, the estimate was 1-2% and downtrending during the quarter. Regarding a membership fee increase, CFO Richard Galanti said, “A question of when, not if. It’s a little longer this time around since June of 2017. So we’re six years into it. But you’ll see it happen at some point. We can’t really tell you if it’s in our plans or not.” No change in membership fees yet, and gross margin pressure is behind the company. For modeling purposes, it’s whether SSS can accelerate without a tailwind from inflation in order to leverage SG&A. The outlook very much seems, as the CFO said, “Steady as she goes.”
OVEREARNING REVERSAL (UNFI)
UNFI reported a loss of $.25 per share in FQ4, better than the consensus estimate of -$.39. Margins were slightly better than expected, but revenues were below. Overall revenue grew 2.0%, decelerating from 3.7% sequentially. Segment trends decelerated slightly from FQ3, with chains up 0.5%, independent retailers up 1.3%, supernatural up 9.5%, and retail down 1.9%. Wholesale growth of 2.7% was driven by inflation and new business wins, with units declining.
Gross margins before the LIFO charge contracted 175bps YOY. Shrink was up, YOY. Adjusted EBITDA was $93M, down from $230M last year due to lower levels of procurement gains due to decelerating inflation.
Management guided F2024 EPS to a range of -$.88 to $.38, below consensus expectations of $1.94. Adjusted EBITDA is expected to be between $450-550M, below consensus expectations of $622M. The EBITDA outlook reflects $125M less procurement gains in the 1H and $62M of incentive compensation compared to nothing in F2023. Revenue guidance of $30.9-31.5B bracketed consensus expectations of $31.1B. Management expects inflation to be up low to mid-single digits in F2024 compared to 9% in F2023 and a rate of 6% at year-end. Management expressed confidence in the multi-year turnaround continuing to progress, debt levels being reduced, adding three new board members, and assessing real estate value creation.
UNFI has been on our short bias list since our Q2 Idea Hunt. The market underestimated how much the company over-earned in the accelerating inflation phase for food at home.
