Margin recovery has kicked in (LANC)
Lancaster Colony reported FQ2 EPS of 1.87 vs. 1.65. Revenue growth of 1.8% was below consensus expectations, but margins were above. The retail business continues to see further opportunities with restaurant brands, while the foodservice business is benefiting from the stable trends among QSRs.
Foodservice grew 1.5%, with volumes up 4.6%. Dressings and sauces grew 1.2%, while frozen breads grew 2.5%. By customer type, national accounts decreased by 0.5%, while branded accounts grew by 9%. Pass-through pricing is now deflationary in foodservice. Deflation will be a 3-4% headwind in the 2H. Segment margins were flat YOY.
Retail grew 2%, with volumes down 1.9%, but excluding own reductions, volumes grew 1.2%. Shelf-stable dressings, sauces and croutons grew 0.5%. Frozen breads grew 3.6%. Refrigerated dressings grew 1%. In the scanner data during the quarter, Chick-fil-A sauces grew 6%, Olive Garden grew 2.1%, Buffalo Wild Wings sauces were flat, New York Bakery grew 4%, and Reames frozen egg noodles grew 17.9%. With the launch of Chick-fil-A salad dressings combined with Marzetti brand dressings, the company had a 27.7% share in salad dressings. The company will soon launch Subway sandwich sauces and Texas Roadhouse steak sauces at retail. Management has shifted the focus from raising prices to recover higher input costs to adjusting on-shelf pricing to hit key thresholds like 3.95 instead of being priced above 4. Segment margins expanded 340bps.
Gross margins expanded 360bps, improving sequentially from +310bps. Commodity prices were lower YOY but remain elevated. Since Q1 of F2023, Lancaster Colony has been recovering some of the previous negative Pricing Net Of Commodities (PNOC). Due to an extended surge in key commodities, including soybean oil, Lancaster Colony lags most CPG companies in recovering gross margins. The company also has several cost savings initiatives contributing to higher margins. PNOC contributed slightly over 200bps, while cost savings initiatives contributed over 100bps. Operating margins expanded 270bps. Lancaster Colony is a Best Idea long. The company’s margins have been pressured by significant input cost inflation and higher costs from new capacity expansion and systems implementations. FQ2 has signaled that the margin recovery is now fully underway, necessitating positive EPS revisions.
Beer Purchasers’ Index (STZ)
The National Beer Wholesalers Association Beer Purchasers Index (BPI) improved across all segments of beer except Below Premium but was remained contractionary. The BPI fell from 44 in December to 43 in January. The BPI is a diffusion index where a reading above 50 denotes expansion and below 50 denotes contraction.
- Imports fell nine points sequentially to 59 in January but were up from 52 last year.
- Premium lights fell to 38 in January from 50 in December but were up from 37 last year.
- Premium regular was down five points sequentially to 43 in January but up from 27 last year.
- Below premium improved six points sequentially to 33 in January but was down from 48 last year.
- Craft decreased two points sequentially to 28 and was up from 21 last year.
- FMB/seltzer was flat sequentially at 35 in January but improved from 18 last year.
The at-risk inventory measure was 42 in January compared to 47 in December, indicating lower inventory levels and cautious ordering by the distributors. 2023 was a difficult year for the beer industry. We recently presented our Beer Industry 2023 Review and 2024 outlook. We did a deep dive into the factors impacting the beer sector’s declines in 2023 and what we think 2024 will bring. We also made several rating changes in anticipation of the comparisons of 2023. For a replay of our 2024 Beer Industry Outlook call, CLICK HERE.
China’s alcohol imports dud (DEO)
Hopes were high for a rebound in alcohol sales as COVID restrictions lifted in China in 2023. Spirits imports did see a rebound, with sales up 22.8% to 2.8B and volumes up by 6.4%. Beer imports fell by 19.1% to 0.58B and by 25.8% in volumes. Wine imports fell 17.6% to 1.16B, while volumes declined by 29.1%. The largest category of imports was brandy, with a value of 1.75B, followed by whisky, with a value of $.58B. France was the largest exporter of wine to China at 492M compared to just 47M from the U.S. Before the increased duties on wines from Australia, China was importing more than 1B from the land down under. Last year, China only imported 60M of sparkling wine from France. Of course, the official figures from the China Chamber of Commerce Foodstuffs represent official imports, not sales, and not products imported via Hong Kong off the books. China represents a significant opportunity for alcohol companies, but for now, it remains just an opportunity.
