1. KR adding to the long bias list
More than half of Americans’ spending on food is outside the home. In 2010 coming out of the last recession, Americans spent more on food away from home for the first time. Through the combination of COVID-19 restrictions and the likely downturn, we are in the share of spending on food at home will reverse years of share loss. The restrictions on eating at restaurants and leaving your home have encouraged more Americans to cook than Julia Child could ever dream. Perhaps the biggest concern for the grocery industry before the coronavirus was the encroachment of Amazon and food delivery. With the long delays for orders and spiraling costs, the challengers have shown themselves not to be able to handle significant share gains. We think the tide turning will extend beyond the current quarter as consensus expects.
2. This BUD could be for us
There has been a lot to not like about Anheuser-Busch InBev over the years and even more recently. The $90bn+ in debt, the volume declines, the currency exposure, the exposure to on-premise, the sale of Carlton & United Breweries being delayed further… and did we mention the debt? What has changed besides the 45% decline in the share price this year? Not that much, which is precisely the point – the power of the world’s largest brewer’s brands are still there, product demand is still there even in recessions, and de-leveraging stories have a certain appeal when the EV/EBITDA multiple is below its comparable history.
The maturities are quite modest for the next four years, and the pricing of the latest bond issue reassures us that the company has plenty of access to cash. So we are adding it to the long bias list as we dig in to determine if the concerns are more than priced in. It’s not precisely the investment attributes we favor, but when prices and fundamentals change, we have to as well.
3. Sprouts inflecting at the best time
Finally, we are adding Sprouts Farmers Market to our long bias list as well. We find Sprouts attractive for many of the same industry reasons behind our Kroger rationale. Sprouts is a grocer focusing on food that is natural, fresh, and organic. Its HSD% store growth opportunity, accelerating SSS, and inflecting margins at a mid-teens P/E multiple is an anomaly. Sprouts also boast a strong balance sheet and generate visible free cash flow. In addition, over a duration, we do not expect Sprouts to be an independent company. That gives us some added comfort with share price pullbacks. Determining if the new CEO is the right leader in improving profitability and reviving the growth engine is one of our essential questions.
Our updated position monitor is below:
