Staples Insights | ACI makes its case, Grocery trips down (ACI), BrightFarms raises $100M (NOVS)

10/21/20 05:50AM EDT

Albertsons makes its case with FQ2 earnings (ACI)

Albertsons reported EPS of $.60 vs. consensus expectations of $.27. The upside was driven by better sales, margins, and lower interest expense. Management guided EPS for the year to $2.75-2.85 compared to a consensus of $2.18. ID sales are expected to be at least +15.5% for the year, implying +DD for the second half. Management’s guidance will finally pull consensus EPS estimates closer to our 2020 EPS power estimate of $3.00. The company said ID sales trends quarter to date are up low double digits, and the promotional environment continues to be rational.

ID sales grew 13.8%, above our estimate and consensus. Kroger reported ID sales growth of 14.6%, but its fiscal year-end is a month earlier and accounts for the difference. Gross margins expanded 85bps, ex. Fuel due to lower shrink, leverage on advertising and supply chain costs, and sales mix. Management made it clear that their intent is to keep expanding the gross margin but to drive more volume. That is an important distinction in one of the most competitive sectors. SG&A leveraged 175bps, ex. Fuel despite $120M of COVID-19 costs. The flow-through on additional sales was 20% on EBITDA.

Management said the 27 Kings Food Market and Balducci’s Food Lover’s Market locations it won in bankruptcy bidding for $96M is expected to be accretive on day 1 because the valuation was lower than Albertson’s. Management also expects synergies from adding the stores to its footprint. We did not think acquisitions would be part of the near term strategy, but it does highlight the cash the company is currently generating (something lackluster in the past). Albertsons also repurchased 6.8M shares during the quarter opportunistically. Net debt to adj. EBITDA was 1.6x on an LTM basis. Management also raised CAPEX plans by $300M to $1.9B.

We are raising Albertsons one spot higher on our Best Idea Long list as management makes a stronger case for a better valuation; see below. We were admittedly too attracted by the company’s valuation previously, but our EPS estimate was also 33% higher than consensus when we added the company to our Best Idea Long list.

Staples Insights | ACI makes its case, Grocery trips down (ACI), BrightFarms raises $100M (NOVS) - consumer staples position monitor

Supermarket trip consolidation (ACI)

Customer traffic is down in the supermarket sector. The combination of growth in online shopping and trip consolidation has led to lower foot traffic. Average spending is up, so spending per trip has also increased. It seems logical that time per shopping trip has also increased. The following chart from shows both the number of trips and the time per trip for the largest supermarket chains. Only three of the largest chains have seen traffic increases during the pandemic, Winn-Dixie (SEGR), Publix, and Safeway (ACI). This shift in shopping behavior is the most significant for grocers, co-tenants, and shopping center owners.

Staples Insights | ACI makes its case, Grocery trips down (ACI), BrightFarms raises $100M (NOVS) - staples insights 102020

BrightFarms raises funds for greenhouse expansion (NOVS)

BrightFarms raised more than $100M in a Series E round of funding. BrightFarms is an indoor salad-greens grower. The company will use the funds to invest in its current farms and expand its network. BrightFarms has now raised more than $200M and has established partnerships with Ahold Delhaize, Kroger, and Walmart. The company currently distributes to 2,000 stores and plans to reach 15,000 by 2025. The company added more than 800 stores this year, driving sales growth of 40% over the past year. Over 95% of the lettuce purchased in the U.S. is grown in California and then trucked. BrightFarms cuts down on transportation by building indoor greenhouses closer to demand.

AppHarvest (NOVS) has announced plans to go public this year. AppHarvest purports to use proprietary technology in the largest indoor growing facility to grow tomatoes. If AppHarvest is successful, an IPO from BrightFarms or one of the many other greenhouse firms does not seem that far away. Greenhouse operators could be the next plant-based trend.

© 2021 Hedgeye Risk Management, LLC. The information contained herein is the property of Hedgeye, which reserves all rights thereto. Redistribution of any part of this information is prohibited without the express written consent of Hedgeye. Hedgeye is not responsible for any errors in or omissions to this information, or for any consequences that may result from the use of this information.