HIGHLIGHTS OF THE WEEK:
In a retail environment that is increasingly turning to online, COST has consistently fended off critics that have said they will face increased pressure from Amazon. We have and will continue to take the other side of that trade, and this holiday season proved once again why COST is a force to be reckoned with. COST reported SSS ex. Fuel and forex in the U.S. of +3.0%, which resulted in a 3.5% 2-year avg. which was flat sequentially. It is critical to note that their SSS results consist of +3% traffic growth, which speaks volumes to the desirable atmosphere they provide their shoppers.
The big overhang on COST currently is what will happen with the new administrations tariff/ border tax proposals, and how it will affect certain companies that import some of their goods into the U.S. for resale. In the words of our Demography sector head Neil Howe, “even in the short run, few importers will be able to absorb the full impact of the tariff without passing on some of the cost to customers. These customers in turn will respond to higher prices by buying less. Over time, as both importers and consumers find new ways to avoid pain, the aggregate decline in import sales (net of tax) will grow. This decline will dry up the supply of dollars in FX markets, which in turn will both ratchet up the dollar and pull down exports.” Bottom line is that the new administration needs to find ways to pay for their tax cuts, and at the same time they need to be careful not to negatively affect U.S. based companies that provide quality jobs for the low to middle class citizens. We are digging into this topic further with our team in Washington, and will have periodic updates for you as we learn more.
KR was the worst performing food retail company we follow, down -4.06% versus the sub-sector median performance of -0.16%. Looking past the reflation trade which has and will continue to positively impact food distributors and retailers alike, KR is subject to horribly virulent multi-employer pension plans. These plans are a significant liability that are not taken into account on the company’s balance sheet, and could cripple the company if they were to go belly up. Anyone who doesn’t think these plans are meaningful should consider the following quote from Mike Schlotman, KR’s CFO, during their 3Q16 earnings call, “It's worth noting that over a longer time horizon on, we do expect our net total debt to EBITDA ratio to grow if we continue to successfully negotiate restructuring of troubled multi-employer pension plan obligations to help stabilize associates' future benefits as we did in the second quarter.” This means they could be faced with the inability to properly invest in growing and maintaining their business, and M&A of meaningful size is likely off the table. KR’s tightly wound business model will continue to be negatively affected by these plans, and until they are able to get out from under them (which may be a very long time, if ever) this business will have a hard time thriving again.
Consumer staples stocks that we follow underperformed the S&P 500 last week with median performance of -0.04% versus the S&P 500 which was up 1.70%. The best performing sub-sectors were household products up 3.21%, led by strong performance from AVP, ENR, NWL & TUP and Ag. Inputs up 2.25%, led by CF, MOS & MON.
Food distribution stocks cooled off last week after an impressive run of outperformance versus the S&P 500 in the 1 and 3 month time periods. Notably, USFD which has caught a number of upgrades, and has carried the sub-sector on their back was down -1.49% last week.
- Protein Processing
- Next in line after household products and ag. Inputs were protein processing stocks up 0.9% during the week.
- Big gainers for the sub-sector were TSN and SAFM, up 2.66% and 2.61%, respectively.
- While CALM dragged the group down about, down -2.55% on the week.
- Beverage & Alcohol
- Beverage & Alcohol sub-sector median performance was up 0.39%
- MNST and TAP pulled the segment forward, with performance of +2.89% and +2.55%, respectively.
- Heading into MNST’s analyst day next week analyst are bullish on MNST’s opportunity in China, and believe that they are better positioned under new trade policies.
- While FIZZ and STZ were laggards with performance of -3.41% and -2.52%, respectively.
- Branded Packaged Food
- Branded packaged food was the second worst performing sub-sector, down -0.31% last week.
- BETR and HRL were the two best performing companies in the sub-sector up 8.40% and 4.40%, respectively.
- BETR announced the transition of Brian Goldberg from CFO to CSO, and that they were appointing Mike DeGrace as SVP of Sales North America. Most recently Mike served as VP Foodservice sales at Kellogg Foods.
- The two worst performing stocks in the sub-sector were APFH and CAG which were down -5.47% and -2.05%, respectively.
- APFH investors were reminded that their IPO lock-up expiration was set to occur on Wednesday January 11th.
- Food Distribution
- Food distribution as previously stated was the worst performing sub-sector last week, down 1.04%.
- Positive performance in the sector was primarily driven by CHEF, which was up 0.95%, while the only other positive performance was from SYY up just 0.02%.
- On the other side, USFD and UNFI were the worst performing companies, both down -1.49%.
- Food Retail
- Food retail was an evenly distributed mixed bag of performance last week, with median performance of the group of -0.16%.
- Top performers in the group were SFM and NGVC, which were up 3.12% and 3.11%, respectively.
- While KR and WMT were the worst performing stocks, down -4.06% and -1.24%, respectively.
12/11/16 FLO | COVERING THE SHORT
12/8/16 COST | SIMPLE IS GOOD
Please call or e-mail with any questions.