Beer - Where to Be in 2024 (BUD, SAM, STZ, TAP)
We are hosting our Beer Industry Outlook call on Tuesday, December 19th.
2023 was a year of muted stock price returns for the brewers, but a dynamic year for market share changes. We will provide a preliminary review of the industry in 2023 and the events that shaped the year. Historically, the beer industry has been one of the most consistent in CPG in modestly raising prices annually. That approach put the brewers behind when a surge in inflationary cost increases from labor to cans forced price increases that lagged the broader CPG sector by half a year. We expect a reversal in some trends in 2024, including markedly fewer market share changes and a moderating cost outlook, but a more challenging outlook for revenue growth.
Stayed tuned for additional details and rating changes.
Got one, waiting for the other (COST)
Costco reported FQ1 EPS of 3.58, up 12% YOY, exceeding consensus of 3.41. The upside was primarily driven by a slight gross margin beat in ancillary business vs. consensus. SSS ex. gas and Fx increased by 3.9%. The U.S. stores increased by 2.6%, Canada increased by 8.2%, Other International increased by 7.1%, and e-commerce increased by 6.1%. Inflation in CPG items was flat to up 1% in the quarter. The U.S. had a 50bps benefit from the 53rd week. Traffic grew 3.6% in the U.S. and 4.7% globally. Average transaction decreased by 1.6% in the U.S. and decreased by 0.9% globally. Membership fee income grew 8.2% with a renewal rate of 92.8% in the U.S. & Canada and 90.5% globally, up 0.1% sequentially.
Gross margins expanded by 43bps and adjusted for gas expanded by 36bps. Core merchandise margins contracted by 3bps ex. gas. Ancillary and other businesses had a gross margin expansion of 22bps ex. gas. A LIFO credit of 15M was a 3bps tailwind. Management made clear that they plan to be a leader in lowering prices, particularly in non-food categories. However, Costco’s buyers have not seen much deflation in fresh food. SG&A deleveraged by 25bps due to higher operations expenses. The company declared a 15 special dividend (the 5th in 11 years), representing a 2.4% yield.
Through yesterday, Costco has outperformed the market by 15% points YTD. Visible sales growth drivers, continued membership growth, and modest margin expansion have been attributes investors have awarded a higher valuation multiple. Costco's expanding gross margins due to a reversal of sales mix trends or strategy is unlikely. Expectations of a membership fee increase, and special dividend were seen as two catalysts. The company announced a special dividend, but the membership fee increase is still TBD for when the company needs it.
Grocery store sales (KR)
Total retail sales ex. auto accelerated to 3.6% YOY from 2% in October. Most subcategories saw an acceleration in sales growth. Grocery store sales increased 0.1% YOY in November, the third consecutive month of deceleration. The two-year average was flat compared to October at 4.3%. The prospects for positive SSS growth for the supermarkets are poor, with continued traffic declines and the possibility of food deflation.
