Adding Hostess to the FQ2 mix (SJM)
J.M. Smucker reported FQ2 EPS of $2.59 vs. consensus expectations of $2.47. Comparable sales grew 7%, in line with expectations. Volume/mix growth was 4%, driven by Uncrustables, partially offset by Jif.
- The Coffee segment sales decreased by 3% while operating margins contracted by 150bps. The company’s lower-priced brands gained volume share during the quarter, with lower prices passed on to the consumer.
- The Consumer Foods segment sales increased by 7% while operating margins expanded by 450bps. Pricing increased by 7% as the company lapped the Jif recall. Hostess will represent 15% of total sales going forward.
- The Pet segment sales increased by 20%, with volume/mix growth of 12%. List prices increased by 8%. Segment operating margins expanded by 520bps. Management expects operating margins to expand further after the fulfillment of contract manufacturing requirements, which will enable the removal of stranded costs.
- International segment sales increased by 9%, with 7% volume/mix growth driven by Uncrustables. Operating margins expanded by 460bps.
Gross margins expanded by 550bps, reflecting a higher margin mix, higher pricing, and lower coffee bean costs. Gross margins were better than expected after raising gross margin guidance last quarter. Operating margins expanded by 270bps. Proforma leverage is roughly 4.5x.
Management updated guidance to reflect the Hostess Brands acquisition and divestments. Comparable net sales growth is expected to be 8.5-9.0% from 8.5-9.5%. Adjusted EPS is now expected to be $9.25-9.65 from $9.45-9.85. The net impact of the Hostess acquisition is expected to be $.40 of dilution this year but to be accretive next year. Capex needs were raised to $610M from $550M, and FCF guidance was lowered from $80M to $530M. Management is betting on the former positive attributes of Hostess’ market opportunity – snacking, handheld convenience, low private label penetration, and C-store mix to continue without an impact from growing GLP-1 penetration.
It's Beer, Hooray Beer (DEO, TAP, STZ, BUD)
Media reports said Diageo is considering its beer portfolio except for Guinness. The company’s beer brands, including Harp, Kilkenny, Red Stripe, Smithwick’s, and Tusker, are a drag on overall margins. The company has considered selling its beer brands in the past. Beer is a minor business for the company, excluding Guinness. Brown-Forman recently agreed to sell its Cutrer Vineyards wine brand to The Duckhorn Portfolio to concentrate on spirits. RTDs with spirits continue to gain share from the beer category despite an unfavorable tax burden. Selling its beer brands makes Diageo less conflicted and removes some organizational complexity. Molson Coors, AB InBev, and Heineken would likely be among the interested buyers. Constellation Brands does not need a beer acquisition, but Red Stripe (with the simple “Hooray Beer” slogan) would make more sense than most of what it has purchased in the past decade.
Minimal growth (VLGEA)
Village Super Market reported FQ1 EPS of $.78, up 3% YOY. The company operates 34 ShopRite and Fairway supermarkets in NY, NJ, MD, and PA and three Gourmet Garage markets in New York City. SSS increased by 2.0%, with digital sales growth of 13%. Inflation was the primary sales driver. Gross margins contracted by 21bps due to 22bps of promotional spending, 20bps of warehouse assessment charges, and 14bps of unfavorable product mix, partially offset by 36bps of higher departmental gross margins. Operating expenses were deleveraged by 13bps due to higher repair and maintenance costs and security costs. Fading inflation is the sales driver as promotional spending was minimal, so EPS growth was minimal.
