US Foods beats a low bar
US Foods reported a $.25 loss in Q2 compared to EPS of $.67 last year, $.10 better than consensus expectations due to lower SG&A costs. Donations of food that was most likely going to spoil backed out of adjusted EPS more than accounted for the upside. Q2 organic case volumes declined 40.2% while independent organic case volumes 42%. Inflation/mix was down 1.2%. Management said the company won $500M in annualized new business in the quarter. Gross margins contracted 190bps. Operating expenses as a percentage of sales increased 120bps. EBITDA margins contracted 200bps to 2.4%. The company recorded a $75M reduction in uncollectible accounts reserve as collections have been better than previously expected. With EPS expectations so low it is quite easy to report significant upside to expectations between various charges, reserves, COVID-19 costs, and donations.
US Foods cited the following left-hand chart to show the recovery in industry transactions from their low in March to -15% in June where it has leveled off. According to NPD only 78% of restaurants are allowed to have on-premise dining. The right-hand chart shows independent restaurants grouped by when they were allowed to re-open. Management pointed out that the restaurants allowed to re-open earliest were only down 10-12% compared to the later groups of restaurants that were down 20-30% at the end of June. At the same time the restaurants in states that have reopened last have not seen further restrictions like some of the states that reopened first, but they are still underperforming. It’s not enough for food distributors like US Foods to have customers that are still in business recover, they need those restaurants to make up for those that have closed during the pandemic as well.
Second stimulus will benefit grocers (GO)
As Congress and the Senate debate the HEROES Act and the HEALS Act the $600 of extra weekly unemployment benefits have expired. Both of the Acts currently include stimulus checks. The following table shows how survey respondents reported spending their previous stimulus checks. The percentage of the benefits spent on food, utilities, and household supplies decreases as household income rises. Food and grocery would be the largest beneficiary of a second stimulus. Grocery Outlet in particular would benefit from customers that are stretched to purchase their grocery needs.
Grocery survey points to small shift towards less spend (ACI)
The latest Hedgeye consumer survey run at the end of July showed relatively stable spend in grocery. The share of ‘more’ grocery spend respondents continue to outweigh the share of ‘less’ grocery spend respondents, at 38% versus 14% respectively. The share of respondents who are spending the ‘same’ ticked down from 51% to 47%. The share of respondents who are spending ‘less’ ticked up to 14% from 12% as seen in the chart below. The 14% of respondents who report spending less reflect the minority that have seen their spending return to pre-COVID levels.
