Removing TAP from the Long Bias list

Molson Coors reported Q1 EPS of $.35 above consensus expectations by $.02 and compared to $.52 last year. Sales decreased by 8.2% YOY in constant currencies, decelerating 11.2% sequentially. Sales fell by 7.2% in North America and 13.4% in Europe. The company took a $50M charge, which includes $31.5M for estimated keg returns. COGS per hectoliter increased by 3.3% due to deleveraging and inflation. EBITDA decreased by 11.9% in constant currency.

On-premise sales are typically 23% of sales for Molson Coors, ~5% higher than the N.A. industry. In N.A., it is line with the industry, but in Europe, it represents a little over half of the sales. In the U.K., on-premise represents 70-75%. April shipments to retailers were down 14% driven by the premium brands, while economy brands were down 4%. The company does not expect off-premise sales to make up for on-premise being nearly nothing. Management said Coors Light and Miller Lite gained share in mid-March during the pantry loading period. The most likely reason was due to consumers’ preference for large package sizes, as we have noted previously. Management said brand volumes in Europe are down 40% through the first four weeks of April, driven by the absence of on-premise.

The company recently launched Vizzy hard seltzer, which has generated some interest in certain states, as seen in the google trends map below, but not enough to give conviction it will offset share losses to the hard seltzer category. Vizzy’s packaging highlighting antioxidants and vitamin C seems to be selling the wrong thing. Maybe we are wrong, but people are consuming hard seltzers for the lower calories, and the perceived less bad for you attribute rather than thinking they are getting healthy while getting buzzed.

Three Insights | Removing TAP from bias list, more cuts at CGC, K's #s look beatable - three insights 43020

Three Insights | Removing TAP from bias list, more cuts at CGC, K's #s look beatable - staples position monitor

Canopy Growth heeds STZ’s marching orders

Canopy Growth announced laying off 200 people on Wednesday as part of several operational changes to increase focus and profitability announced in February. It was the third round of cuts now totaling 1,000 employees (including furloughs) that includes exiting South Africa and Lesotho, shutting down its Yorktown indoor facility, ceasing operations in Colombia, and ceasing farming operations in Springfield, NY. Pre-tax charges will be between C$700-800M. It has been less than six months since Constellation Brands’ former CFO became CEO, and it is clear he is bringing some much-needed discipline to Canopy’s scattered operations. We weren’t fans of Constellation Brands’ equity investment in Canopy because we prefer companies to focus on areas of operational excellence, cannabis was unlikely to be a disruptive innovation, and a partnership could have been done without a large equity stake. Now with Canopy cordoned off on the P&L, the further investment put off beyond the intermediate-term, fiscal discipline being instilled, and another writedown expected Constellation Brands should probably trade more on the prospects of its alcohol businesses than shackled with Canopy.

The market does not think the best way to start the day is Kellogg’s confirming guidance

Kellogg reported Q1 EPS of $.99, $.04 above consensus expectations. Organic growth was 8% vs. expectations of +5.7%. COVID-19’s impact is estimated to be half of the growth in the quarter. N.A. snacks grew 10.8% organically while N.A. cereal grew 2.9%. In Q2 Kellogg is seeing, “elevated if slowing at-home consumption, partially offset by severe softness in away-from-home channels; a slowing in certain emerging markets; high investment and utilization in our supply chain to get food to the marketplace; and less commercial activation and innovation activity as our customers and we focus on getting food on the shelf.” In the three weeks after the stockpiling spike N.A. frozen food has settled in at twice the growth rate pre-COVID while cereal’s growth rate has increased from +LSD% to +20%.

Kellogg was one of the few companies to confirm its outlook for 2020. By establishing guidance, the company is likely to be conservative. That setup looks attractive to us at 17x consensus expectations, a 4.5% FCF yield, and a strong balance sheet.