Infant formula plays spoiler (PRGO)
Perrigo reported Q3 EPS of $.64 vs. consensus expectations of $.63. Revenue grew 0.1% in constant currencies, with organic sales declining 1.2% compared to +0.8% sequentially. Global sales of cough, cold, and pain products grew 7%, with a strong sell-in offsetting a slow start to the cough/cold season in the U.S.
Gross margins expanded by 300bps from 220bps sequentially. Higher pricing and the benefits of the SKU rationalization were the drivers. The supply chain reinvention program added 70bps. CSCA's gross margins expanded by 430bps due to pricing, portfolio reductions, and the infant formula acquisition. CSCI gross margins contracted 120bps due to an unfavorable mix, with the UK store brand business outpacing the segment. Overall EBIT margins expanded by 130bps. CSCA's operating margins expanded by 90bps. CSCI's operating margins expanded by 250bps, boosted partially by lower advertising and promotional spending.
Management lowered the top end of revenue and EPS guidance for the year. Revenue guidance was lowered from 7-11% growth to 4-6%, while organic revenue growth was lowered from 3-6% to 1-3%. EPS guidance was lowered from $2.50-2.70 to $2.50-2.60. The revisions reflect a larger Fx headwind and the impact of the FDA’s recent actions on infant formula.
In recent years, there has been considerable doubt the company could recapture lost margins. The SKU rationalization efforts, along with higher prices, have demonstrated the margin recovery. The infant formula business has had several challenges since the FDA shut down a major plant and created a national shortage. Perrigo made a couple of strategic moves to improve its competitive position, only to see the FDA modify the industry’s practices. Importantly, the $.35 EPS hit from those changes is not a permanent impairment, but a one-time impact.
Please see our separate note for more details.
Flow Through Beat In Q3 (CELH)
Celsius Holdings reported Q3 EPS of $.89, exceeding consensus expectations of $.51. The upside was from better-than-expected revenue growth and the flow through to margins. Overall revenue grew 104% YOY and 18% sequentially. North American sales grew 107%, largely driven by distribution gains, shelf placement, and innovation.
Celsius said it was the highest-selling energy drink on Amazon, and in the MULOC channel, it has a 10.5% share. Q3 sales on Amazon increased 42% YOY. Over the past year, the company’s ACV has grown from 73% to 95.6%. International sales grew 56%. The first major international launch is planned to be in Canada in Q1. The domestic growth drivers include innovating SKUs, flavors, shelf placement, floor displays like coolers, the food service channel, and increasing velocity on the shelf.
Gross margins expanded 860bps to 50.4%, exceeding consensus expectations of 46.3%. Lower packaging and raw material costs, as well as improved waste and freight, were gross margin drivers. Sales and marketing expenses leveraged by 4% points. G&A expenses leveraged by nearly 9% points. The EBITDA margin of 26.9% exceeded consensus expectations of 18.3%. The company is investing in growth initiatives, but the revenue growth is exceeding management’s plans.
As impressive as the sales growth has been with the PepsiCo distribution, the margin flow through has been even more so. Distribution points remain an opportunity with the current level at half of Monster and Red Bull. Household penetration was recently estimated to be 25%, up from 11% a year ago. Expectations are high for Celsius, and the company is lapping the distribution agreement with PepsiCo. Celsius is a Best Idea long as it grows the energy drink category with better-for-you attributes.
Technology platform disruption clouds Q3 (GO)
Grocery Outlet reported Q3 EPS of $.31 vs. consensus expectations of $.27. SSS increased 6.4%, driven by an 8.6% increase in transactions partially offset by a 1.9% decrease in the basket size. In late August, the company implemented new technology platforms that caused disruptions that had a -150bps impact on SSS and -50bps impact on gross margins. The new upgrades were for product, inventory, financial, and reporting platforms.
Gross margins expanded 80bps YOY. Operator commission payments increased by low-double digits in the quarter, reflecting healthy independent operators. SG&A grew by 8.7% and leveraged 20bps due to higher commission payments, store occupancy costs, and higher incentive compensation partially offset by vendor receivable.
Management narrowed EPS guidance to $1.04-1.06 from $1.04-1.08. EBITDA guidance was narrowed to $248-252M from $254-260M. SSS guidance was narrowed to 7-7.5% from 7-8%, implying a Q4 deceleration to 1-3%. The gross margin impact of the platform disruption is expected to be a larger 150bps headwind in Q4.
Management mentioned that more new customers are coming with higher incomes than the current base. Management also mentioned the promotional environment has picked up slightly, but not at a level that changes the customer proposition. Grocery Outlet’s East Coast expansion is spreading to new states. As the company proves its expansion in more states, the multiple should expand, reflecting a much larger TAM and decades of additional store openings.
