Position Monitor Changes (PEP, KVUE, HSY, K)
PEP – We are raising PepsiCo higher on the Best Idea long list. PepsiCo is diversified by geography and product category. It also has levers, which was made clear on its last earnings report.
KVUE – We are removing Kenvue from the long bias list. Would the spin-off timing be better in the 2H?
HSY – Hershey falls lower on the long list as PepsiCo moves higher. Hershey is a 2H outperformance setup with the timing of ERP implementation, product launches, and savings initiatives.
K – Kellanova moves up higher on the long list. The visibility on higher gross margins gives management levers to pull on revenue growth. The multiple should reflect the upside potential.
Bad omen (IMKTA)
Ingles Markets reported that FQ1 EPS declined 38% YOY. Ingles Markets operates 198 supermarkets in the Southeast. Excluding fuel, SSS increased by 1.0%, decelerating sequentially from 1.6%. The comparison was difficult due to a “record week of sales in Q4 2022 from weather-related events.”
Grocery sales decreased by 3.5% YOY, perishables decreased by 1.7%, and non-food (alcohol, tobacco, pharmacy, and HBA) sales increased by 9.4%. Gross margins contracted 180bps ex. fuel due to inflation and raw material shortages. Operating expenses deleveraged by 100bps ex. fuel due to higher wages, insurance, taxes & licenses, and professional fees in that order. Vendor allowances increased by 7%. Retail operating margins contracted by 230bps to 3.6%. Ingles Markets' operating margin contraction, despite SSS still being positive, is not a good indicator of future margins for the supermarket sector, with inflation continuing to decelerate.
U.K. Energy drink ban (MNST, CELH)
More than 40 U.K. health organizations, researchers, and public health leaders have written to the Secretary of State for Health and Social Care in the U.K. to restrict the sale of energy drinks to those under the age of 16. Their letter follows the recent publication in the Public Health journal on the effects of energy drinks on minors. After the review of 57 studies, researchers noted the strong association between drinking energy drinks and the use of smoking, alcohol, and other substances. There were other associations, including poor sleep quality, low academic performance, and other psychological distress.
A proposal has been submitted to add the energy drink ban for children to the Labour Party’s election manifesto. According to a government-commissioned study, up to a third of children in the U.K. consume at least one energy drink weekly. Many supermarkets have adopted voluntary bans on the sale of energy drinks to young people under the age of 16, but they are readily available in smaller shops and vending machines. Labour leaders also support supervised toothbrushing in schools. In the U.S., there is a much smaller movement against energy drinks for children. The American Medical Association has supported a bank on the marketing of energy drinks to children for over a decade. Celsius recently announced partnering with Suntory to distribute in the U.K. market.
