A new floor and a simpler path (STKL)
SunOpta reported adjusted EPS of $.5M or breakeven per share, down from $.02 last year. SunOpta reported Q3 revenue growth of 5.9% driven by volume/mix growth of 5.5% and pricing of 0.4%. Management estimates the total plant-based milk industry was up LSD% with strength in food service and club stores offset by food retailers in the tracked channel. For shelf-stable plant-based milk, the food service channel is four times larger than the tracked channel for SunOpta. Q3 was the 13th consecutive quarter of double-digit growth for fruit snacks. The business grew 16% to $24M in Q3. The first two of three production lines at SunOpta’s new Texas plant are at 60% utilization. The third line is expected to come online in Q1.
Gross margins contracted 410bps as reported, but adjusting for the start-up costs at the two new plants, adjusted gross margins contracted 140bps. The contraction reflected the incremental depreciation of the new equipment partially offset by a positive mix shift. Adjusted EBITDA grew 8% to $19M, and EBITDA margins expanded by 20bps.
Management maintained their outlook for 2023, adjusting for the sale of the frozen fruit business. As we expected, management brought down their long-term EBITDA outlook for 2024 and 2025 with the sale of the frozen fruit business. EBITDA was lowered to $90M and 125M for 2024 and 2025, respectively, from $125M and $150M. The frozen fruit business contributed $25M to the 2025 forecast. Specifically, for 2024, revenue growth guidance is 8-13%, and EBITDA growth guidance is 14-21%. Rather than including in communicated targets business that they do not currently have, the guidance now reflects existing customers/contracts. New wins the company is trying to be awarded for the 2H of 2024 now represent the upside instead of being embedded in targets.
We hosted a Black Book update on SunOpta earlier this week, highlighting how the sale of the frozen fruit business was a game changer. SunOpta’s leverage improves dramatically with the sale and will be below the targeted 3x in 2024. That provides capacity for a share repurchase plan or more growth capital and upside to the shares. The path for shares doubling or tripling from current levels has fewer variables and significantly less downside risk. For the webcast replay CLICK HERE.
If you split it, will they come? (K)
Kellanova reported Q3 EPS of $1.03, exceeding consensus expectations of $.89. The upside was driven by better margins, while revenue was below consensus expectations. Organic revenue grew 3.9%, below consensus expectations of +4.3%. Price/mix increased 11.3%, partially offset by a 7.4% decline in volumes. Organic growth by product category was: snacks grew 5%, noodles grew 17%, frozen foods were flat, and international cereal increased by 2%. W.K. Kellogg’s North American cereal sales decreased by 1%.
- North America's organic revenue declined by 0.3%, with volume declines offsetting increased prices. Snacks and frozen were flat. Operating profit decelerated to 8% growth.
- Europe's organic revenue increased by 8.2%. Snack growth of 17% drove results, while cereal decreased by 1%. Operating profit grew 17% YOY, the first increase since Q2 2022.
- Latin America's organic revenue increased by 7.9%. Growth in snacks accelerated to 17%, while cereal decelerated to 2%. Operating profit accelerated to 27%.
- AMEA's organic revenue increased by 12.1%. Growth was driven by snacks +13% and noodles +16%, while cereal was +4%. Operating profit grew by 14%.
Gross margins expanded 150bps YOY. Operating profit grew 10.3% YOY, with margins expanded by 120bps YOY.
Management guided Q4 EPS to $.73-.76 vs. consensus expectations of $.79. Operating income was guided to $380-390M, below consensus expectations of $438M. Increased headwinds from interest expense and pensions totaled $.07 in Q3. Q3 was above the company’s growth formula, but decelerating from the 1H. Three of the four geographic segments are expected to see improving margins. Q4 is expected to be aligned with the growth formula as well but increased unanticipated headwinds from interest rates will lower EPS results.
Kellanova’s timing for the spin-off was less than optimal twice, first when announced and then when completed. The amount spent also seems excessive. The purpose was to optimize the growth rate of the snack and emerging market businesses. The past can not be changed, but the Kellanova improved growth outlook should be reflected in a higher multiple once the headwinds for consumer staples are lifted. Then maybe investors will come to appreciate the new Kellanova.
Supermarket challenges (AD-AMS)
Koninklijke Ahold Delhaize reported Q3 EPS of €.58, in line with consensus expectations. SSS ex. gasoline increased 3.1% YOY, with the U.S. operations up 0.9% (decelerating sequentially from 3.6%) and Europe up 7.0%. Management said the reduction in SNAP benefits in the U.S. was a 4% point headwind to sales growth in Q3 when they initially planned on a 2% headwind. The pharmacy was a sales driver in the quarter. Volumes have improved as inflation has been reduced in Ahold’s U.S. markets. Management noted that two of its banners have had positive volume trends in the most recent weeks, and the overall trend in Q4 is similar to Q3. Management said they have seen “investment, trade funds, and promotional support coming into our business to boost volumes.” Management believes its banners gained share in Q3 on the East Coast. Online sales grew 6.4% YOY in constant currencies, with Europe up 7.6% and the U.S. up 4.4%.
Operating margins in the U.S. contracted 80bps to 4.2% due to higher operating costs, higher shrink, unfavorable sales mix, and 30bps from lapping favorable insurance costs. With additional in-store actions to reduce shrink and further volume support incentives from vendors, management expects the modest margin pressure to last only a couple of quarters. Operating margins in Europe were flat at 3.5%. Management lowered the year's EPS outlook to slightly below 2022 from flat YOY.
The company announced the sale of its FreshDirect business to Getir for an undisclosed amount that is likely immaterial. Ahold sees online grocery continuing to shift towards same-day delivery. Ahold is also shutting down its next-day fulfillment facilities. FreshDirect began in New York City in 2022, and Ahold acquired an 80% stake in 2021 for an estimated $300M. When FreshDirect was in startup mode, it raised a reported $517M. FreshDirect operated out of a central fulfillment center in the Bronx and had revenue of ~$700M. Getir is an instant grocery startup from Turkey. Getir’s valuation according to TechCrunch is only a quarter of what it was a year ago. So it is unlikely Getir spent much to acquire FreshDirect. Valuations continue to come down for online grocery. If the business model did not work during a pandemic, it is difficult to see how the online share in food retail will gain dramatically in the future. Ahold’s decelerating SSS and operating margin contractions are negative read-throughs for the supermarket industry.
