"Americans are getting stronger. Twenty years ago, it took two people to carry ten dollars’ worth of groceries. Today, a five-year-old can do it."
-Henry Youngman
This is Spring Break for the schools in our area. Many families use the opportunity to go away on trips. I do not usually brag about expensive trips I have taken, but I just went to the grocery store…
We focus on rate of change at Hedgeye. Food inflation at the grocery store was +1% YOY in March. That is down significantly from the +double-digit growth rate at the beginning of 2023. Apparently, the President shares our rate of change focus in his State of the Union address, “inflation keeps coming down.” The consumer on the other hand does not put rate of change in the pantry. The consumer understands that their grocery bill is up 37% since the pandemic. Consumers have responded with lower unit demand, which for some time was fine with the manufacturers who could not find the labor to produce more anyway.
Walmart was predicting food deflation in its mid-November conference call, a welcome prospect for customers. However, Quad 2 means growth and inflation are reaccelerating. One quarter later, Walmart changed its food deflation prediction back to inflation. It will be much more difficult for the consumables industry to pass on higher prices this time. The list of winners and losers will not be as lopsided as before.
Consumer Staples Grind...
I cannot write an Early Look note without an investment recommendation. My top long idea currently is Lamb Weston (LW), a leading French fry manufacturer. Shares sold off after the company reported disappointing results in large part due to ERP implementation challenges and a softer outlook. Just as food prices surged in grocery stores, they have inflated even more in restaurants. An analysis of McDonald’s menu prices over the past decade assures the consumer that their memories do not deceive them, it costs a lot more to eat out.
French fries remain the most popular side by of 8x more than the next most popular side. The attachment rate, the number of times the side is added to an order, has also remained stable since the pandemic. French fries are also the most profitable item on the menu for the U.S. restaurant industry. I am still doing a dad’s duty to finish the fries on my children’s plates.
The share price implies a broken growth stock, but I believe the headwinds and concerns are transitory. While French fries are a modest, but steadily growing product category Lamb Weston has seen volatile results since the outset of the pandemic. The shutdown of the restaurant industry, two short potato harvests followed by a bumper crop, and significant price increases have flipped investors’ sentiment like windshield wipers. The longer-term EPS power remains between $7-8 and industry concerns over pricing and volumes lifting would lead to a $160 stock. The shares are trading at their lowest valuation since going public, but margins are at an all-time high backing out the impact from the systems transition. How quickly volumes recover may come down to when the golden arches recall value and not the prices on the menu.
Immediate-term Risk Range™ Signal with @Hedgeye TREND signal in brackets
UST 30yr Yield 4.52-4.82% (bullish)
UST 10yr Yield 4.30-4.74% (bullish)
UST 2yr Yield 4.69-5.10% (bullish)
High Yield (HYG) 75.31-76.61 (bearish)
Investment Grade (LQD) 103.98-106.80 (bearish)
SPX 4 (neutral)
NASDAQ 15,608-16,217 (bearish)
RUT 1 (bearish)
Tech (XLK) 195-206 (bearish)
Insurance (IAK) 107.43-117.40 (bullish)
S&P Momentum (SPMO) 76.52-80.66 (bullish)
Healthcare (PINK) 28.38-30.57 (neutral)
Shanghai Comp 3001-3095 (bullish)
Nikkei 37,902-39,800 (neutral)
BSE Sensex (India) 72,002-75,091 (bullish)
DAX 17,665-18,393 (bullish)
VIX 14.56-20.17 (bullish)
USD 104.62-106.98 (bullish)
Oil (WTI) 81.51-87.75 (bullish)
Gold 2 (bullish)
Copper 4.20-4.48 (bullish)
Silver (SLV) 27.35-29.03 (bullish)
Bitcoin 58,912-67,251 (neutral)
Best of luck out there,
Daniel Biolsi
Consumer Staples analyst
