“We are in no way making money, but we’ve lost the least amount that could be expected and at some points are breaking even,” said Michael Muzyk, President of Baldor Specialty Foods, a distributor of specialty produce mostly for foodservice in the Bronx, NY. He was referring to the company’s switch to servicing the retail channel from the foodservice channel.
Nomad Foods beats & raises narrows M&A focus
Nomad Foods reported Q2 EPS of €.34, up 26% YOY vs. consensus of €.30. The upside was driven by better margins, as the company had previously reported a sales update in June. Organic revenue grew 12.3%, driven by volume/mix growth of 9.9% and price increases of 2.4%. Revenue grew DD% in each month, including July, even after reopening in many European countries began in May. Gross margins expanded 50bps, expanding a quarter earlier than expected. This was driven by lower promotions as production was challenged to keep up with demand, making promotions unnecessary. The stronger Euro will benefit gross margins going forward. The company will also reinvest an additional €10M to drive future growth.
Management raised their guidance to exceed the previous range. For EPS management now expects it to exceed €1.27 from €1.24-1.27 and for adjusted EBITDA to exceed €460M from €450-460M previously. For Q3 organic revenue growth is expected to grow HSD%, guiding conservatively from current trends. The company also announced a modified Dutch auction to purchase up to $500M, representing 11% of the market cap. We would like to see management create more value through acquisitions, but the repurchase does not signify acquisitions are off the table. Management said the M&A focus will now be targeted toward European frozen food, which they would not have said if there was a dearth of targets. Our interpretation is that it signifies that the next acquisition will not be large or transformational, but below $500M. That is a range we prefer due to lower risk. It highlights the cash flow the company is generating in the current environment (it has generated more FCF through half of 2020 than all of 2019). It also takes advantage of a valuation that continues to be lower than its peers, despite the consistent results. The winning growth formula for the company is LSD% organic sales growth, cost leverage, acquisitions, synergies, and financial leverage, driving EPS growth of LDD%. It is not premised upon the current HSD% organic sales growth or large acquisitions.
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Grocery spend driven by accelerating basket size (ACI)
In the most recent four weeks, trips to the grocery store to purchase consumer packaged goods, edible categories, and general food have been even with pre-pandemic levels. Non-edible shopping trips have been up about 3% over the same time period. The growth in grocery spending has been driven by larger basket sizes. In the week ended July 19, basket size increased 15% YOY in CPG and general food, while the edible category increased 18%, and the non-edible category increased 8%. The basket size has accelerated 3% since the week ended June 28. The following charts show the general steadiness in traffic trends in comparison to the basket size.
Q2 grocery wrap up – regionals outpaced national chains
Taking stock of the Q2 reports for the grocers, there was 1) not a lot of variance among the companies in the post-stockpiling period, 2) some regional grocers outperformed the national chains, 3) even after making adjustments Whole Foods lagged.
- Weis Markets, a mid-Atlantic regional grocer, reported a 24.1% SSS increase in Q2. The company doubled net income, with a 23.7% increase in sales.
- Ingles Markets, a regional grocer with roughly 200 stores in six southeast states, reported a 12% sales increase in Q2 driven by a 23.1% SSS increase. Grocery sales grew 28%, non-foods grew 18%, perishables grew 22%, while gasoline fell 54%. Gross margins expanded 290bps due to lower promotions. Net income grew 167%, with a 12% increase in sales.
- In comparison, Amazon reported brick and mortar stores (which is predominantly Whole Foods) had a 13% sales decrease. It’s important to note that online orders are excluded from brick and mortar sales.
