LW in the midst of a recovery
Lamb Weston reported FQ1 EPS of $.61, nearly doubling the consensus EPS estimate of $.31. Results were still down from $.79 in the prior year, but expectations were set too low from the prior quarter. For the quarter, QSRs approached prior-year levels by leveraging their drive-thrus. Full-service restaurants stabilized at 75-80% of prior-year levels. Non-commercial restaurants like schools, lodging, and events remained at 50% of the prior year. Demand at retail peaked at 50% growth in April and May, before moderating 15-20% growth in August. Net sales declined 12%, with volumes down 14%. The global segment revenue decreased 14% with a price/mix down 1%. Shipments to full-service chains improved to down 20-30% by the end of the quarter. Foodservice sales in the quarter declined by 22%. Retail sales increased by 19%, with volumes up 11%.
In the first four weeks of FQ2, management said shipments to large chain restaurants were down 5%. Shipments to foodservice customers were down 20%. Shipments to non-commercial customers, which historically represented 25% of the foodservice segment, are down much more than 20% while shipments to full-service restaurants and QSRs perform better. The company’s retail business is flattish due to the loss of some private label contracts. Shipments to Europe, China, and Australia are flattish, while other Asian and Latin American markets are lower YOY. EBITDA declined $31M in the quarter, of which $21M was due to COVID-19 related costs.
Management confirmed that the potato crop in their growing areas in the Northwest and Europe was consistent with historical averages. Management’s comments about the pricing environment weakening on the margin added some concern. “We’re largely through the negotiations for the domestic large chain restaurant contracts that are up for renewal this year, and in the aggregate, we have maintained stable pricing in the portfolio. For those contracts yet to be finalized, we’ll remain disciplined and take an approach designed to maintain and reinforce our strategic customer relationships. Outside of these large restaurant contracts, on balance, domestic pricing continues to hold up well. However, we have begun to see increased competitive activity in some domestic market segments and more value-oriented product segments in some international markets. As demand continues to strengthen, we expect pricing pressure in these segments will lessen.”
We added LW to our Long Bias list three weeks ago. The company is not through the entirety of the competitive pricing pressure, but the worst-case scenarios have not manifested. We continue to think that if Lamb Weston can demonstrate pricing power in 2021 as the market recovers, shares could see $90 again.
Beer imports accelerate with the resumption of production in Mexico (STZ)
Total alcohol beverage imports declined 4% over the twelve-month period ended in August. Over the last three months, imports declined by 5%. 30% of all imported alcoholic beverages by value came from Mexico. Imported beer declined 5% by volume and declined 2% by value over the last 12 months. Over the last three months, imports were flat by volume and up 3% by value. This compares to a 20% volume decline and an 18% value decline in the three-month period ended July, as seen in the following chart. 71% of beer imports by value come from Mexico, which shut down beer production from early April to June.
For the last 12 months, import packaged wine grew by 9% by volume and declined 6% by value. Over the last three months, packaged wine volumes grew 13% and declined 14% by value. 36% of all packaged wine imports come from Italy. For the last 12 months, imported packaged spirits grew 2% by volume and declined 6% by value. Over the last three months, volumes grew 5% and declined 6% by value. Exported packaged spirits for the last 12 months grew 37% by volume and grew 5% by value. Over the last three months, volumes declined 27% and declined 26% by value.
Grocery anchored tenants are bulletproof (SFM & GO)
Melina Cordero, a managing director and leader of CBRE’s retail capital markets business for the Americas, said that because of the decline in real estate transactions, it is hard to draw firm conclusions about cap rates in the different retail sectors. The one exception is that the pandemic has minimally impacted grocery-anchored centers. Melina Cordero believes that grocery-anchored segments may be “a bulletproof class” and that we “may actually see some cap rate compression in the months to come.” With the highly visible traffic driven by grocery stores, the current environment is very favorable for grocery chains paying rent and expanding. In comparison, shopping centers collected 72.8%, 80.2%, and 81.6% of the rent they billed in July, August, and September.