Throwing the baby out (PRGO) Buy the disappointment
Perrigo reported Q4 EPS of $.86 vs. consensus of $.83. Organic revenue decreased by 0.6% with SKU rationalization a 2.4% headwind compared to -1.2% with a 2.8% headwind sequentially.
- CSCI organic growth increased by 2.9%. The cough/cold season in Europe was less severe this year. Gross margins contracted 180bps due to inflationary impacts. Price increases in Q1 will boost the top line and improve margins going forward.
- CSCA organic growth decreased by 2.4%. SKU rationalization led to a 3.4% decrease. Gross margins expanded by 320bps driven by the SKU rationalization with only a small impact from infant formula. Opill will be shipping to retailers soon with the plan to support the launch, offsetting profits this year.
- Overall gross margins expanded 140bps compared to +300bps sequentially.
Guidance of $2.50-2.65 was below consensus expectations of $3.01. The flat outlook for EPS was attributed to actions taken for the infant formula business. Otherwise, it would be up mid-teens. Organic sales growth is expected to be between 1 to 3%.
Perrigo is taking action in its infant formula business to improve the manufacturing processes because of the new guidelines from the FDA. Investors probably want nothing more than to throw the baby (formula) out. The business has seen a series of challenges (industry shortage, production shortfall, FDA changes) and remedies (the acquisition of Gateway and price increases). The process changes Perrigo is now implementing are similar to what Chipotle undertook to address food poisoning years ago. The changes are much more involved than new equipment or labor but integrated changes throughout the manufacturing. Perrigo’s new CEO can see the amount of variance between what the level the manufacturing should be at (scrappage, volumes, efficiencies) compared to the actual results. The actions need to be taken by Perrigo, but like Chipotle’s competitors not necessarily making the same changes to its processes, the other infant formula manufacturers may not choose to implement them at their facilities.
Changes have been made at the newly acquired Gateway plant and will be rolled out to the other facilities. 2023 was already a down year for the profits of the Infant Formula business, and instead of recovering in 2024, it will be down even further. Management points to $140M in EBIT for the infant formula business by projection compared to less than half that earned in 2023. In Q1, Infant Formula will be down by $50M YOY and then recover to flat YOY in Q2. Management is projecting a $.65 EPS impact from the infant formula business in 2024. Although the process changes are not fully implemented, there is a reason to believe that the guidance is conservative beyond Q1. The timing is also unfortunate, with the other businesses performing in line with expectations. We understand the disappointment and the share price decline following the Q4 results, but the infant formula business is not impaired. It just lost a year. We believe the share price decline represents an attractive risk/reward.
Q4 Results and Acquisition Insights (GO)
Grocery Outlet reported Q4 EPS of $.18, vs. consensus expectations of $.16. SSS growth of 2.7% was above expectations of 2.1%, driven by transactions growth of 7.5%, partially offset by a 4.5% decrease in transaction size. Management previously disclosed the new technology implementations negatively impacted SSS by 200bps. Gross margins were flat YOY, but the technology disruption was a 130bps headwind. The company is launching its first private label offering in the 2H with a goal of 100 SKUs by year-end. Inventory was up 4.8% YOY. Management provided more details on United Grocery Outlet. The stores are company-owned and have similar EBITDA margins but half the unit volume.
Management guided 2024 EPS to $1.14-1.20, above consensus expectations of $1.14. SSS are expected to grow 3-4%. Management expects to open 55-60 new stores in 2024, including 40 from the United Grocery Outlet acquisition. Gross margins are expected to be around 31.3% in 2023. The technology disruption is expected to have a -50bps impact on Q1 SSS and -100bps on gross margin. Acquisitions will be part of the company’s 10% store growth plans. Finding IOs for the acquired stores will be a critical aspect of integrating the 40 stores but will not begin until next year. Utilizing acquisitions adds visibility to the 10% store growth target and may provide upside to the stock multiple.
Q4 Same Story, but a new leader (SAM)
After adjusting for one fewer week, Q4 depletions decreased by 1%. Shipments decreased by 3.5%. Twisted Tea remains the growth driver, with 29% sales growth. Truly remains a drag, with a 22% decline in the off-premise channel. Gross margins expanded by 60bps driven by price increases and lower inventory obsolescence, partially offset by inflationary costs, higher third-party production shortfall fees, and higher brewery process costs per unit. Advertising, promotional, and selling expenses decreased 7.6%. HARD MTN DEW will expand from 17 to 50 states as distribution switches to Boston Beer’s wholesaler network.
Management guided depletions and shipments to be between -LSD% to +LSD% in 2024 and price increases to be between 1 and 2%. Depletions were estimated to be down 2% through the first eight weeks of 2024. GAAP EPS was guided to be between $7 to11. Third-party production volume fees will continue to be a headwind in 2024. Management expects the hard seltzer category volumes to decline by a low-teens amount in 2024. Will Truly’s declines slow before Twisted Tea’s growth cools off? If Boston Beer can replicate what Truly and Twisted Tea have done in the RTDs, there would be another growth phase, but E&J Gallo has the early lead.
Dave Burwick announced that he will retire and be replaced by Michael Spillane. Michael Spillane is currently the company’s lead director. Dave Burwick is credited with Boston Beer’s focus on “beyond beer” and the growth of Twisted Tea and Truly. While Mr. Burwick leaves big shoes to fill, Mr. Spillane is a well-respected consumer executive with an accomplished track record.
Flash Call Replay (KR, ACI)
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