March SSS improve (COST, KR) – Buy Costco, short Kroger
Costco reported an acceleration in sales in March. U.S. SSS increased by 7.4%, with a 1.5% benefit from the Easter shift. While food sales accelerated from +MSD% in February to +MSD to +HSD% the larger improvement came from non-food sales, which accelerated from +MSD% to +LDD%. The comparison to last year was the same sequentially in food but eased in non-food. Will improving general merchandise sales trends at the warehouse clubs and big box discounters increase competitive intensity in the food category? Driving traffic through food in order to sell higher general merchandise items is the strategy at many of the big box retailers.
Additional WIC demand (PRGO, STKL) – Buy SunOpta and Perrigo
The USDA announced a reimbursement update for the Special Supplemental Nutrition Program for Women, Infants and Children (WIC) earlier this week. The update finalizes changes proposed in November 2022. The new WIC food packages will provide increased food amounts and varieties, including infant formulas, bringing the total funding up by $1B to $7B for ~6.6 million low-income mothers and children (~53% of U.S. babies). A more comprehensive range of packaged foods, including some plant-based milk, will be included in what the mothers and children can purchase. The dairy milk included in the food package each month will fall from 4-6 gallons to 3-4. Dairy milk can also be substituted with plant-based milk. The changes also increase flexibility around infant formula by creating a separate food package for mothers who partially breastfeed. WIC state agencies will have two years to implement the revisions. The USDA also created a pathway for state agencies to approve products as they become available instead of waiting for future rule changes for plant-based products. As the rule changes, demand for plant-based milk and infant formula will increase.
March Food CPI accelerates (WMT)
The headline CPI for March increased 3.5% YOY, above consensus expectations of annualized growth of 3.4%. The annualized core CPI increased 3.8%, above consensus expectations of 3.7%. Food at home CPI increased by 1.2% YOY in March, accelerating from 1.0% in February. The two-year average decelerated by 80bps to 4.8%.
The meats, poultry, fish, and eggs category accelerated from -0.4% YOY in February to +1.4% in March. The fruits and vegetables category accelerated from 0.8% YOY in February to +2.0% in March.
Walmart’s management changed their tune last quarter from calling for deflation. With the perimeter grocery departments seeing an inflection, the prospects for deflation have fallen dramatically.
