Q4 trends remain in Q1 (KHC)
Kraft Heinz reported Q4 EPS of $.78, a penny ahead of consensus expectations. Both revenue and EBITDA were below expectations. Organic revenue growth of -0.7% had a -150bps gap compared to consumption in U.S. tracked channels due to trade timing and a retailer inventory deload. North American price decelerated from +5.8% to +2.5% sequentially, but volumes declined 5.5% in Q4, similar to the -5.9% decline in Q3. In the international segment, a lower price increase led to an improvement in volumes. International price increased by 7.7% in Q4, decelerating from 11.6% sequentially, and volumes improved to -0.6% in Q4 from -3.6% in Q3.
Gross margins expanded 260bps, driven by efficiencies and revenue management. Inflation was quantified as 3% in the quarter and is expected to be similar in 2024. Guidance bracketed consensus expectations. Organic sales growth of flat to +2% embeds a 1% price increase and volumes inflecting positively in the 2H.
Management said Q1 is sequentially slowing from Q4. Management also said they underestimated the impact of the ending of emergency SNAP payments. Our model does not reflect volumes inflecting with smaller price increases in North America while cost inflation outpaces pricing. Kraft Heinz is on our short bias list.
More grocery promotions ahead (AD-AMS, KR, SFM)
Ahold reported Q4 EPS €0.73 vs consensus €0.62 with the upside driven by better margin performance. In Europe, SSS increased by 6.5%, and operating margins contracted by 30bps. U.S. SSS decreased by 1.0%, with weather and the timing of New Year’s Eve having a -0.5% impact. The expiration of the emergency SNAP benefits was quantified as a 4% headwind during the quarter. Food Lion was positive for the 45th consecutive quarter. A reset of Stop & Shop is planned, which includes price/quality improvements and merchandising enhancements. U.S. operating margins expanded 40bps to 5.2% due to one-offs, including a reserve release and one-off settlement. However, it also benefited from the divestment of FreshDirect and its losses, partially offset by higher shrink. The company intends to use the savings from FreshDirect to “help fund investments into our U.S. brands’ store portfolio and customer value propositions.” Management guided 2024 EPS to flat YOY. Times are getting tighter in grocery and cutting digital deliveries losses is low-hanging fruit. Kroger and Sprouts are on the short list. The industry getting more promotional is negative.
A new exit strategy (KO, ZVIA, OTLY)
Coca-Cola is reportedly among the suitors for Poppi. Poppi is a better-for-you soda brand. It has 25 calories and prebiotics to improve gut health. Poppi also splurged on a 60-second Super Bowl ad which proclaimed it as the future of soda. To put the Super Bowl spending in perspective, Poppi had raised more than $40M in its fundraising rounds. The estimated $14M spend does not include the ad’s production costs exceeding by more than 25% of what Zevia spent in advertising and marketing expenses in 2022. Poppi may have learned from Oatly’s 2021 Super Bowl ad. The question is whether Coca-Cola did.
Close to certain (FREE)
Whole Earth Brands will be acquired by Ozark Holdings for $4.875 per share, representing a 56% premium from the initial bid on June 23 for $4 per share. Whole Earth Brands is a plant-based sweetener company. It was a former SPAC created by the combination of Merisant, manufacturer of Equal and Pure Via sweeteners, and Mafco, manufacturer of a licorice extract. Sweet Oak is controlled by Martin Franklin, and Whole Earth’s Chairman is Irwin Simon. In December 2022, Martin Franklin’s son, Michael Franklin was appointed as CEO of Whole Earth Brands. The shares were roughly $4 at the time. Michael Franklin had to step down as CEO once the initial bid was offered. There are few certainties, but Whole Earth Brands is coming public again, and Martin Franklin earning a good return on the investment is close.
2nd gauntlet thrown (KR, ACI)
Colorado becomes the second state to sue to block the merger between Kroger and Albertsons. The state is also challenging the companies’ no-poach and no-solicitation agreements between them. Are the states becoming concerned that the FTC will not oppose the merger and that the suits are attempts to pressure the regulatory agency?
