04/30/17 07:32 PM EDT

CONSUMER STAPLES ROUNDUP (PF, COST, APFH)

Howard Penney

Shayne Laidlaw

BEST IDEAS LIST HIGHLIGHTS / ADJUSTMENTS

Pinnacle Foods (PF) – PF, which is a best idea long for us in the consumer staples space, reported 1Q17 results on Thursday, that largely impressed consensus expectations, highlighted by robust margin improvement and the affirmation of their 2019 target for 300-400bps of adjusted gross margin improvement, which will be largely driven by continued cost savings efforts, which are outpacing inflation as well as improvement of the portfolio (SKU rationalization/premiumization). PF continues to outpace their broader categories by outmaneuvering their competition leading to market share gains of 80bps in the quarter, their 12^th consecutive quarter of gains. Although PF continues to perform well, the industry in which they operate continues to have its challenges. Mark noted softness in the quarter was driven by Easter, historically warm January and February, and the continued shift to unmeasured channels.

Their frozen category saw TDP’s grow 7%, driven by strong innovation with the Bird’s Eye brand into more value added segments such as skillets, veggie rice and Hungry Man Selects. Grocery sales were 3.4%, including double digit growth on Duncan Hines, which we would note spells trouble for GIS. PF noted “constructive pricing and in-store activity” as key drivers of the Duncan Hines success. Additionally, Perfect Size for One (single serve cake that heats up in the microwave in one minute) which rolled out in February is off to a hot start and will achieve national distribution by the end of the second quarter. Although the baking category is one of the slower categories in the center of store, PF has seemed to have achieved success with their initiatives, which could spell trouble for their competition, in particular GIS, who’s Betty Crocker brand has been relegated to a cash generator versus top-line grower.

We continue to believe that PF has a great opportunity to expand their margins towards the top end of the range driven by robust productivity initiatives and continued innovation to improve their position on the shelf. The fundamental improvements in the business coupled with their M&A driven mindset, gives us confidence in this company, leading us to remain LONG PF in our Consumer Staples Best Ideas list.

Costco (COST) – This week COST declared a special dividend of $7 per share (roughly $3.1B total) payable May 26, 2017, to shareholders of record at the close of business on May 10, 2017. Many knock COST for their lack of leverage, with this announcement they are clearly taking note of that as the special dividend will be funded primarily through additional borrowings. In addition to the special dividend they are increasing their regular quarterly dividend by 5% to $0.50 per share.

AdvancePierre Foods (APFH) – We are removing APFH from our LONG bench. We had just put APFH on our LONG bench in the beginning of April, with the intentions of doing a Black Book. But the fun was short lived as this week it was announced that they have entered into an agreement to be acquired by Tyson (TSN). TSN has agreed to pay $40.25 per share or about $4.2B, notably the stock is currently trading above the offer price.

SECTOR PERFORMANCE