Grocery discounts on the way, eh? (L.CN)
Canadian consumers blame the grocery chains the most for the high food costs. 28% of Canadians polled by Nanos Research Group said the rise in food prices was due to grocery stores increasing their profits. Higher fuel costs and profiteering by food manufacturers were cited by 18% and 15%, respectively. Food prices took longer to disinflate in Canada than in the U.S., with prices in September 5.8% higher YOY. Food inflation has also been a much more prominent issue politically in Canada. The Canadian government tasked the grocers to create plans to restore price stability or incur unspecified tax measures. The Industry Minister said he has received their plans, and Canadians would soon see aggressive discounts for key food products.
The Ontario government has introduced legislation that would strengthen consumer protections. The Better for Consumers, Better for Business Act, 2023, builds on existing protections and makes it easier for businesses to comply. The Act would double the maximum fine for businesses that are price gouging, deceiving consumers with contracts that are difficult to understand, or making it difficult for shoppers to cancel membership programs. The current political situation necessitates lower margins for the grocers in Canada. Loblaw is on our short list.
Q3 Commodity relief (KMB)
Kimberly Clark reported Q3 EPS of $1.74, exceeding consensus expectations of $1.60. Overall volumes declined 1%, with price up 5% and mix up 1% for organic revenue growth of 5%. In Q2, overall volumes declined by 3%, with price up 6% for organic growth of 4%. In North America, volumes increased by 2%, with prices up by 4%. Market share improved sequentially in six of eight categories. Developed & Emerging Markets volumes declined by 2%, with prices up 5%. Developed Market volumes declined by 8%, with prices up by 7%.
- The Personal Care segment had organic growth of 7%, with volume growth of 2% and price up by 4%. Volumes grew for the first time in five quarters. In Q2, organic growth was 4% with volumes -3% and price +6%. In North America, volumes grew by 6%, with prices up 2%. Segment operating margins expanded by 250bps.
- The Consumer Tissue segment had organic growth of 2%, with volumes down by 4% and prices up by 5%. In Q2, organic growth was 4%, with volumes -4% and prices +8%. In North America, volumes decreased by 1%, with prices up by 5%. Segment operating margins expanded by 320bps.
- The K-C Professional segment had organic growth of 4%, with volumes down by 6% and prices up by 9%. In Q2, organic growth was +13%, with volumes -3% and prices +14%. Segment operating margins expanded by 550bps.
By product category, baby and child care products grew 6%, away from home professional products grew 13%, while consumer tissue products were flat YOY.
Gross margins expanded 530bps, improving sequentially from +380bps, exceeding 2019 levels. Favorability in raw materials was offset by higher energy prices, currency, and higher labor costs. Commodity costs have inflected for the company after significant margin pressure. Operating expenses deleveraged 310bps due to inflation, brand investments, and incentive accruals. Operating margins expanded by 210bps. Going forward, the company has lapped most of its big pricing actions last year.
Management raised guidance for adj. EPS to +15-17% from +10-14%. Revenue growth guidance was raised from +1-2% from flat to +2%. Organic sales growth is now expected to be +4-5% from +3-5%. Fx is now expected to be a greater headwind of -3% from -2%. Adjusted operating margins are expected to expand 170bps from 150bps previously. Input costs are now expected to be up by $50M compared to $100M previously, while other manufacturing costs are expected to be $50M higher at +$250M.
Kimberly-Clark is unaffected by GLP-1 risk, and EPS guidance has increased since the last earnings report, but the shares have declined 13% vs. the S&P 500 decline of 7%. GLP-1 drugs are not the only challenge for the sector, but organic volume growth would be the solution to many of the issues for the stock performance.
Less trust in conventional medicine (PG, RKT.LN)
According to CivicScience polling, consumers have less trust in conventional medicines. Compared to an earlier poll in 2021, there has been a 50% increase in the number of people who say they would use holistic medicines such as vitamins and herbal remedies to treat common ailments like nausea, headache, and the common cold. Vicks DayQuil/NyQuil is the leading cold medication, followed by Mucinex, and Theraflu. Lower trust seems understandable in the wake of the pandemic and, most recently phenylephrine being labeled as ineffective by an FDA advisory committee.
