The Long Case (WMT)
We presented our long Walmart Black Book yesterday. Our estimates are above consensus expectations due to higher margin projections. The question is how high they will go in the future, not if they will. With Walmart, you have growing competitive moats, margins above expectations, share gains in-store and online, and a transforming digital business that is becoming the only real contender for Amazon's crown. For the replay CLICK HERE.
The investment themes from the presentation:
Protein Shaking (SMPL)
Simply Good Foods reported FQ3 EPS of $.50, above consensus expectations of $.48. Revenue was slightly below expectations, but margins were above. In Q3, Quest's sell-through grew by 13.5%, outpacing the snack category growth of 6.4%. Atkins grew 9% in the measured channels and 5% in the unmeasured channels, but management appears to be deprioritizing investments in the brand. With the acquisition of OWYN, protein shakes now represent 23% of the company’s sales mix. Gross margins expanded by 320bps due to lower packaging and ingredient costs. However, packaging will not be a tailwind for much longer, and ingredients will soon be a headwind.
Management reaffirmed their outlook for organic sales to be at the midpoint of the long-term outlook of 4-6% growth. Retail sales QTD are tracking in line with management’s plan. Management expects some gross margin pressure next year due to ingredient inflation, particularly cocoa. We are bullish on the protein RTD shake category but are concerned about the OWYN acquisition. The larger competitors have stronger distribution networks and relationships with retailers than Simply Good Foods. Integrating OWYN may be a distraction while the Atkins brand struggles in retail.
Spending survey (BUD)
According to Morning Consult’s spending survey, consumer alcohol purchases experienced the largest month-over-month decline in May. Overall, respondents said they spent 2.9% less on service categories in May. Spending on alcohol decreased by 18.1%, while spending on groceries declined by 5.8%. Increased outlays on education, vehicle insurance, auto payments, housing, and utilities are likely crowding out some spending in other categories. Spending on alcohol has pulled back this year. Headwinds also include the cannabis growth as well as an increase in health concerns around alcohol consumption.
