“As a company, we’ve stated for kind of at least a couple of years, maybe three years that I really feel that the inventory of restaurants is too much. There’s just too many seats…. Inevitably most of these restaurants that are shut down will turn into a restaurant at some point.” Performance Food Group CEO
UK grocery and frozen food rebounds (NOMD)
For the week ended August 1 total CPG index levels in the UK grew 5% compared to the prior year as seen in the following chart. Edible categories increased 10%, outpacing non-edibles at +3%. The frozen category increased 15%, accelerating from a weak -1% last week. The only category performing better than frozen food was alcoholic beverages up 25%, accelerating from +10% the prior week. Fewer people are traveling abroad in the UK due to travel restrictions which should boost CPG sales.
The U.K. is Nomad Foods' largest market at 31% of sales. Nomad Foods said last week that sales in July grew double digits, similar to June. Management’s guidance is for organic sales growth of HSD% for the year and MSD% for Q3. July is the smallest month of Q3 for the company and management expects retail sell through of frozen food to decelerate in Q3. Shipments are still trying to return inventory levels at retail to normal levels, because it was unable to meet demand in Q2.
The company’s tender offer for $500M of shares between $23 and $25.50 began Tuesday and will continue through September 9. The company’s tender offer highlights the strong cash flow the company is generating, strong balance sheet, as well as a signal that investors should not expect a large transformative transaction. Investors should be comfortable that they own a European frozen food company with steady organic growth prospects. We don’t believe the growth prospects and lower risk profile of the company is reflected in the EV/EBITDA valuation of 10.8x consensus estimates. Nomad Foods remains a Best Idea Long.
Performance Food Group reports a wider loss
Performance Food Group reported an adjusted loss per share of $.86 in FQ4 vs. EPS of $.77 last year and expectations of a -$.25. The wider loss likely sets up for profitable quarters in F2021. The company reported a 2.1% sales decrease as organic case volumes declined 34.2%, but acquisitions offset most of the decline. Overall food inflation was +0.8% driven by beef and offset by deflation in dairy and poultry. The company’s organic independent case volume declined 25.8% during the quarter, outpacing total case volumes which declined 34.2%. PFG outpaced competitors benefiting from a higher mix of pizza and Italian restaurants. Total organic sales are running down 12.5% currently. Foodservice organic sales are down LSD% despite continued softness in the Northeast and West Coast. Gross margins contracted 80bps. Operating expenses increased 44.2% primarily due to the acquisitions. Bad debt expense increased $49M in the quarter, compared to $19M in the previous three quarters. The company also recorded a $23M increase in inventory write-offs. Performance Food Group’s earnings quality was better than US Foods, because it did not exclude bad debt expense in the adjusted EBITDA calculation.
Metro reports similar grocery sales trends north of the border
Metro, the Quebec supermarket chain, reported FQ3 EPS of C$1.08, a penny ahead of consensus EPS estimates and 20% higher than the prior year. Food comped up 15.6% with inflation of 3% while pharmacy comped up 1%. SSS increased 25% in April then decelerated throughout the quarter. Online sales grew 280%. The company continues to see fewer visits, but higher basket sizes. Management said SSS are up 10% in the first month of Q4. Gross margins expanded 30bps.
Metro is the third largest grocer in Canada after Loblaw (Short Bias List) and Sobeys. All three grocers canceled their C$2/hour wage bonuses given to employees during the pandemic on the same day. That prompted a summons to testify to legislators and a call for an investigation from the Competition Bureau. Yesterday, Metro echoed Loblaw’s earlier comments that they have not been contacted by the Competition Bureau. Walmart recently told its suppliers in Canada that it would charge them 1.25% on the COGS plus an additional 5% for e-commerce sales. Other grocers including Metro expect to receive similar fees from suppliers. The 5% fee is a tacit admission of the lower margins in e-commerce orders that management teams have tried to not acknowledge.
