Where was the flow through? (SFM)
Sprouts Farmers Market reported Q3 EPS of $.65 vs. consensus of $.62. SSS increased 3.9% vs. consensus expectations of 2.0%, accelerating from 3.2% sequentially. Transactions were up, the sequential increase in AUR lessened, and the decrease in units per transaction lessened. E-commerce sales grew 16% YOY to 12.1% of the total sales. Both perishable and non-perishables had positive comps in meat, grocery, dairy, and frozen. Sprouts store label product sales grew 14% YOY to 20.5% of the mix. Overall sales grew 8%, net income decreased 0.3%, and EPS grew 6.6%.
Gross margins contracted by 10bps YOY due to higher distribution costs from the new and expanded DCs in California and Texas. Q3 gross margins were a notable inflection from 70bps of expansion in Q2. SG&A spending deleveraged by 30bps YOY due to new store costs, higher wages, and incentive compensation. Adjusted EBITDA margins contracted by 40bps YOY. The lack of flow through from 8% revenue growth and 3.9% comp growth was the largest takeaway from Q3 results.
Management guided Q4 EPS to $.42-.46 vs. consensus expectations of $.43. SSS are expected to be roughly 3% with inflation of low to mid-single digits. For the year, management raised guidance from $2.68-2.76 to $2.77-2.81. SSS are expected to be up roughly 3% from 2-3% previously. Gross margins are expected to be flattish. Curtis Valentine was announced as the new CFO, replacing the retiring Chip Molloy at the end of the year. Chip Molloy has overseen a brief period of consistent EPS reports. We have not seen the results to suggest Sprouts Farmers Market should be accelerating growth in its store. At the same time, accelerating growth is beginning to put pressure on margins.
Q3 Results (BUD)
AB InBev reported Q3 EPS of $.86 vs. $.85, the first full quarter after the Bud Light boycott. Organic revenue grew 5% vs. 4.7% consensus expectations. Organic volumes decreased 3.4%, worsening sequentially from -1.4% while own beer volumes decreased by 4.0%. Revenue per hl increased by 9%.
- N.A. volumes decreased 17.9%, worsening sequentially from -14.5%. The U.S. business had a revenue decline of 13.5% despite revenue per hl up 4.9%. Shipments decreased 17.6%, weakening further from -15% in Q2. Depletions decreased 16.6%, weakening further from -14% in Q2. U.S. EBITDA decreased 29.3% and in the quarter contributed 24% of total EBITDA compared to 30% last year. Management said 10% of retail customers have made fall reset changes which resulted in Bud Light losing 0.8 facings out of an average of 20 per store resulting in a loss of 5% of cubic space. If Bud Light only lost 5% of its shelf space in the fall, there is a larger reckoning in the spring with volumes running down 30%. Revenue in Canada fell HSD% as volumes declined by low-teens and revenue per hl declining while revenue per hl increased by HSD%.
- Middle Americas volumes grew by 1.7% while revenue per hl grew by 9.3%. Organic volumes increased by 0.9%. In Mexico revenues grew by MSD% while rev. per hl grew by HSD%, and volumes decreased LSD% resulting in higher margins. Colombia grew DD%.
- South America volumes decreased by 2.2% with revenue per hl increasing by 26.2%. Organic volumes decreased by 2.6%.
- EMEA volumes decreased by 1.5%. Revenue per hl increased by 11.7%. Organic volumes decreased by 1.6%. In Europe, revenue and profit grew by LSD% while premium and super premium grew by MSD%. Revenue per hl in Europe grew by mid-teens due to pricing actions while volumes declined by HSD%.
- Asia Pacific revenue grew by 5.1% with volumes increasing by 0.2% and revenue per hl growth of 4.9%. Organic volumes increased by 0.1%. China grew by 7.1% with revenue per hl growth of 7.3% with flattish volume growth.
Total EBITDA grew by 4.1% while margins contracted 30bps. EMEA and Asia Pacific were the only regions where EBITDA exceeding expectations. The company also announced a $1B share repurchase program. BUD’s price increases have pressured volumes, marketing has not changed the conversation for Bud Light, and shelf resets threaten to make the share losses permanent.
Beer Distributors Index (TAP, BUD, SAM, STZ)
The National Beer Wholesalers Association’s (NBWA) Beer Purchasers Index (BPI) improved to 48 in October from 45 in September. The BPI is a diffusion index where a reading above 50 denotes expansion in volumes while below 50 indicates contraction. October is the third consecutive month of contraction. Only two of the seven beer categories were in expansion.
- Imports increased to 67 in October from 59 in the prior year.
- Below premium was 45, lower than the prior year's 47.
- Premium lights improved YOY to 53 from 45 last year and 47 in September.
- Premium regular increased to 49 in October from 32 in the prior year and 40 in September.
- Craft beer remained in contraction at 31, up from 23 in the prior year and well below 27 in September.
- FMBs & hard seltzer’s reading was 28 in October, flat from September, but improving from 18 in the prior year.
The at-risk inventory measure was 50 in October, down from 53 in September, as inventory levels have come into balance. Constellation Brands has been one of the beneficiaries of Bud Light’s lost share. Molson Coors has been the other beneficiary, with Coors Light and Miller Lite offsetting the weakness of Bud Light to drive Premium Lights higher.
