PEP NOT GOING FLAT
PepsiCo reported a top and bottom-line beat in Q1 yesterday. Organic revenue growth of 7.9% outpaced consensus expectations of 3.4%. Europe and the AMESA region both grew 14% well above ~+5% expectations. EPS of $1.07, up 10% in constant currencies, was $.10 better than consensus expectations. For Q2 management expects organic revenue to decline LSD% significantly outperforming Coca-Cola’s -25% trend in April due to a lower on-premise mix and strength in snacks. PepsiCo will be investing in marketing this year, especially in e-commerce, but also to retain new customers of its brands, which speaks to the business momentum when the company can go on offense when the majority are on defense or in survival mode. Estimates should creep higher as analysts consider the momentum, investments, the sales mix, and prospects for the new energy drink portfolio.
PepsiCo lost little time in adding to its energy drink portfolio with an N.A. distribution agreement with Bang Energy after its acquisition of Rockstar Energy was approved by the FTC the previous week. VPX’s Bang Energy drinks contain amino acids and creatine, and no sugar focuses on the fitness market. Being freed from its contract with Rockstar to partner with Bang was likely a significant reason for Pepsi to make the acquisition. Bang Energy grew 250% in c-stores last year to #3 in market share. Shares of Monster Beverage traded up briefly at the open yesterday before selling off as the most likely chess move – Coca-Cola acquisition was offset by the risk of Bang gaining more share with PepsiCo. PEP is on our Long Bias list.
U.K. GROCERY NO LONGER STOCKING BUT ELEVATED CONSUMPTION (NOMD)
The latest U.K. grocery market figures from Kantar Worldpanel for the 12 weeks ending April 19 show that take-home grocery sales grew 9.1%. Online sales are now 10.2% of the grocery market up from 7.4% a month ago. In the four weeks ended April 19, grocery sales grew 5.5% compared to 20.6% in March. Grocery inflation for the 12 week period was 1.9%.
The shift in calorie consumption at home, eating, and shopping habits will not revert quickly. The number of lunches eaten at home in the U.K. has doubled. On-the-go food and drink sales sold at grocers have fallen. Household trips to the grocery store have fallen by 3 to 14 times a month while spending per trip has risen. Convenience stores in the U.K. have benefited from sales up 39% in the four weeks.
According to the British Frozen Food Federation in the four weeks ended March 22, sales of frozen food in the U.K. increased by 28.1%. Some retailers reported a 48% increase in fish finger sales and a 68% increase in frozen peas. Kantar said that every category of frozen food grew over the same period led by frozen veggies up 42.5% in volume. In comparison, over the past year ended March 22 sales of frozen food increased 1.7% with pizza up 7.9%, veggies up 3.7%, potato products up 5.7%, and fish up 4.6%.
Nomad Foods, as the leading frozen food manufacturer in Western Europe, is well-positioned to benefit from the shift in meal consumption. The U.K. is Nomad Foods’ largest market at 31% of sales. Nomad Foods is the Best Idea Long, for our Black Book replay and materials: CLICK HERE
ADDING MDLZ TO THE LONG BIAS LIST
Mondelez reported Q1 EPS of $.69, up 11% YOY, and $.04 above consensus expectations. Organic revenue grew 6.4%, driven by North America’s 13.4% growth. By category biscuits grew 11.7%, chocolate grew 2.6%, and gum & candy were flat. Gross margins were 40bps below expectations due to Fx (-20bps YOY), higher commodity costs, and COVID-19, and operating margins were 50bps below (-30bps YOY).
Many consumer staples companies are beneficiaries of the calorie consumption shift from away from home to at home. Mondelez is one of the few that also benefits from what the consumer consumes more of while at home. Customers are consuming more snacks while they are spending more time at home. We contend that more food will be purchased for consumption at home, and categories like snacks and chocolate are categories that have limited pantry loading. The company’s developed markets are seeing more purchasing by consumers (+DD% in March) while the developing markets are negatively impacted (-LSD% in March). Unlike many other companies, Mondelez has seen China bounce back rather quickly (+LSD%).
