Grocery demand drops (ACI)
Supermarket demand for CPG fell to +5% in the week ended August 30 from +16% the previous week, as seen in the following chart. Demand for edibles fell from +17% to +8% in the latest week. The frozen department saw the smallest drop from +24% to +19%, while beverage alcohol saw the steepest drop from +20% to +1%. The meat department also experienced a steep drop in demand from +17% to -1%. The meat department was impacted by higher promotions headed into the Labor Day weekend.
General Mills sees sales moderate (GIS)
Shares of General Mills fell 5.8% yesterday after management provided a financial update in conjunction with an investor conference presentation. On the company's conference call on July 1, management referred to the duration of the elevated at-home food demand as highly uncertain. Yesterday, management said the food at home demand has moderated since the quarter ended May. Retail inventory levels were modestly replenished during the quarter ended August, and management expects that it will be normalized over the next three quarters. Management also said fixed cost leverage should result in operating margin expansion in FQ1. In contrast, higher external supply chain costs and a more difficult comparison should result in operating margin contraction in FQ2. Consensus estimates already incorporated a sequential slowdown in sales for FQ1 and FQ2 as well reflected the quarterly cadence of YOY margin changes management stated. The difference is that two months ago, management had not seen a moderation in demand that they now see. Two months ago, management also mentioned they expected a recession – maybe investors will eventually care when management sees it.
Mission Produce files to go public (AVO)
Mission Produce filed a registration statement on Friday for a future IPO. The company is a leader in sourcing, producing, and distributing fresh avocados. It owns 10,000 acres in Peru and four packing facilities in the US, Mexico, and Peru, among other assets for the distribution of avocados globally. The company is led by CEO Steve Barnard, who is well regarded in the industry.
With the recent flurry of activity in SPACs, it is almost surprising Mission Produce chose the traditional route to going public. Going public via a SPAC would have allowed management to tell its story and goals more effectively. Agriculture commodity companies, in general, do not make for the best public companies due to the volatility of results. The US market was $6.5B in 2019 while the global market was $14B, and it has been growing at a 9% CAGR. To illustrate the growth potential internationally in Mexico, the per capita consumption of avocados was 14.9 pounds compared to 8.0 pounds in the US, and 2.3 pounds in the EU. The company's growth rate has plateaued in recent years, with uneven growth in volume. In the year ended April 30 the company had sales of $934M compared to $1.2B for Calavo Growers. Calavo Growers' shares are down a third YTD.
Mission Produce's profitability is attractive, with 14% EBITDA margins compared to 7% last year for Calavo. Mission Produce pre-IPO is less than 1x levered. KR, at 14% of sales, is the largest customer. The company is tripling its CAPEX spend this year to $90M for farm development and packhouse expansion. Producing some of the company's own needs allows the company to enter into fixed-price contracts, which many customers like restaurants desire.
Our interest in Mission Produce is tied to learning if the IPO is a liquidity event for insiders or the beginning of an acquisitive strategy in the future. The registration statement does not make it clear why the company wants additional equity financing now. Industry pricing and margins were at a historical high last summer. The category is an attractive sub-sector of agriculture, but it is more of a commodity business than a category disrupter like plant-based meat.
