Lamb Weston shows how much worse smaller QSR chains are performing
Lamb Weston reported Q4 EPS of -$.01 vs. consensus of $.16. Adjusted EBITDA of $78M missed consensus expectations of $100M. Sales declined by 16% or 22%, excluding the extra week. Volume declined 17%/23%, respectively, for the extra week. From late March through early April, weekly shipments to large chain restaurants declined 50%, then improved to -15% by the end of May. Weekly shipments to full-service restaurants and non-commercial outlets bottomed at 20% of pre-COVID levels in mid-April then improved to 70% by the end of May. Retail sales were the one bright spot, which increased 56% with volume up 39% and price/mix up 17%. Adjusted EBITDA declined $137M to $78M. $74M of the decline was due to pandemic related costs while the remainder was due to lower sales and higher manufacturing costs.
In the absence of guidance, management was very forthcoming about current trends. For the first seven weeks of Q1 management said shipments in the US are 85% of prior-year levels. Shipments to large QSRs have recovered to 85-90% of prior-year levels. McDonald's, a large customer, reported US comps were down 2.3% in June and were up slightly in July. That points to how much weaker the smaller QSR chains are performing. Shipments to full service, independent restaurants, small QSRs, and non-restaurants like cafeterias, hotels, and event sites have recovered to 70-75% of prior-year levels. Shipments to retail customers are up 5-10%. In Europe, the QSRs operate more like full-service restaurants, and shipments are at 75% of prior-year levels. Since the beginning of the quarter, shipments in Europe have improved from -35% to -20%. In China, shipments in Q1 are at 85% of prior levels but have improved from -20% beginning in the quarter to -5% recently. The company reduced its contracts with farmers by 20-25% compared with the prior year, giving it more flexibility to purchase in the open market where there is ample supply.
Lamb Weston is on our short bias list as we think consensus estimates for F2021, as well as the multiple, are still too high.
Frozen produce outpacing fresh (CAG)
Sales of frozen fruit and frozen vegetables continue to outpace sales of fresh fruit and vegetables. Frozen foods benefit from several drivers during the pandemic, including staying edible for longer, lasting longer when visiting supermarkets less frequently, less waste, and better for you (higher vitamin retention). Sales of frozen food accelerate with stockpiling. Consumers are not stockpiling food like the onset of the shutdowns in mid-March, but they have continued to purchase more than consumption for most weeks during the pandemic. Fresh vegetable growth is a good indicator of home meal consumption as it is a component of meals cooked at home in the near term. Fresh vegetable growth of 17% in the week ended July 19 indicate elevated home meal consumption.
MDLZ navigates a global pandemic
Mondelez reported Q2 EPS of $.63, growing 16.1% YOY, vs. consensus of $.56. Organic growth was 0.7%, but the company gained market share in 85% of its revenue base. Mondelez's results best depict how the pandemic is impacting in different countries. Comparable sales rose 11% in North America but fell 11% in Latin America. Asia, Middle East, and Africa comparable sales decreased 3%. Internationally the company will continue to benefit as more countries reopen their economies. In the US, where the pandemic has continued, the company is positioned to benefit from more snack occasions at home. In Latin America, where COVID-19 seems to be growing, sales are negatively impacted by more self-imposed restrictions. The company is removing 25% of varieties as it simplifies its supply chain and improves costs.
Mondelez has more emerging markets exposure than many other global brands, but its performance in each market has been more related to how the country is dealing with the pandemic than how the brands have operated. We are modeling Q2 to be the low, with revenue and profits accelerating sequentially. Mondelez is on our long bias list. We believe it to be one of the best positioned global consumer brand portfolios. We are encouraged to see that the company continues to make investments for the future and will be one of the few brands stronger after the pandemic and recession than before.
