STZ level sets expectations; pandemics have many impacts, but the brands remain resilient
Constellation Brands level set expectations for the quarter at a virtual conference yesterday. The scanner data has reported a marked acceleration in the off-premise channel during the pandemic for alcohol. The on-premise channel has been shut down to nearly nothing. Investors understanding that STZ under-indexes in the on-premise channel to about 14% of beer sales, imputed robust combined results. Management explained that there are several differences between the companies reporting scanner data and those that do not. In most environments, the difference is not that significant, except for pandemics, it turns out—the scanner data over-indexes to large chains that are outperforming smaller independents. In areas of the country with many more independent packaged goods stores like NY and NJ, the difference is sizable. There are also some states where the state controls the retail of alcohol and does not report the scanner data. Besides, there are two less selling days in May (one less day for Q1). Those differences add up to a Q1 depletion for beer that management expects to be in the range of up low to mid-single digits. Shipping in Q1 is negatively impacted by the partial shutdown of beer production in Mexico such that management expects shipments to decline low to mid-single digits. In wine, the situation is similar, with management expecting depletion to be down low to mid-single digits despite robust off-premise sales in the scanner data. Shipments are expected to be down ~10% with the exit of certain brands.
On the other hand, management sounded much more confident that the reduction in production capacity will be ending shortly. Management clarified some rumors around product shortages, saying that they are limited to select SKUs while the breweries are focused on large pack sizes. Management was adamant that consumers would be able to purchase Corona and Modelo throughout the summer, but their desired package size may not be available. Furthermore, management said that they fully expected shipments to resume by the second half of Q2.
We presented our Best Idea Long Black Book on Constellation Brands earlier in the week. We posited whether a company’s comparisons could be both challenging and easy at the same time? That certainly appears to be the case, but the brands are strong, and demand is high. There are one-time issues that are negatively impacting results, but tailwinds from the current period that should continue to be a benefit.
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Grocery trends benefit from competitive closings
The daily sales report from Womply (CRM provider) shows 35.7% YOY sales growth on May 22, a fairly consistent elevated level since the beginning of April, at local grocery stores, as seen in the following chart.
Since the stay at home restrictions began, the daily sales report from Womply has been showing much greater YOY gains than large national grocery retailers like Kroger, Walmart, and Target have reported. The likely reason is the greater benefit of competitor closings for local grocers than the large grocery retailers. The following chart from Womply is the total sales growth of all local grocers, reflecting the spending in the channel without adjusting for closed stores, which is more aligned with the larger chains.
Grocery Outlet sponsor exits
Grocery Outlet announced that Hellman & Friedman, its private equity sponsor, will distribute the remainder of its holding to its equity holders. This will complete the exit of Hellman & Friedman’s investment with the remaining 9.6M shares it held. The shares represent 11% of the shares outstanding. We expect the market to absorb the increased float with limited drawdown as the last secondary on April 23 had a short-lived impact, and the final distribution removes the last of the hangover. The demand for bargain groceries from consumers, as well as future locations from owner/operators couldn’t be any better. It will just come down to execution, but there are additional tailwinds in real estate availability as well as food supplier excess capacity. That should make execution more like swimming with the tide.
