We are presenting our grocery themes update on Wednesday at 2 PM ET. It has been four months since our last update, and consensus EPS estimates have come much closer to our own projections. While we see the spending shift to food at home from food away from home lasting longer than consensus expectations, our thoughts on how to be positioned have been adjusted. We will be making several changes to our position monitor.
Truly powers another big beat (SAM)
Surprising, no one Boston Beer reported a big beat and raise driven by Truly Hard Seltzer. Q3 EPS of $6.51 was well ahead of consensus expectations of $4.63. Depletions grew 36% because the company is more than just Hard Seltzer. Depletions for Sam Adams, Angry Orchard, and Dogfish Head fell and received little attention despite being major parts of the business. Management raised EPS guidance for the year to $14-15 vs. prior guidance of $11.70-12.70. Consensus EPS estimates were $12.71, a penny above the range because apparently, analysts do not venture far from management. Management expects depletion and shipment growth between 35-45%, with a price increase between 1-2%. Gross margins are expected to be between 46-47%, down from 46-48%. Gross margins contracted 80bps in Q3 due to increased external production. Despite the robust sales growth, advertising and selling expenses only increased $11.5M. Management expects advertising and selling expenses to be up to $55-65M for the year, down from $70-80M previously. No one owns SAM shares for expense leverage. This should be the time to invest COVID-19 driven sales growth in brand building. In 2021 management expects to increase the spend at a similar rate to revenue growth.
The company is doubling its internal and third-party can packaging capacity in 2021, and inventory levels are expected to remain tight in Q4. White Claw is just as aggressive with its growth plans and more constrained by capacity in 2020. We don’t expect industry growth to double again in 2021. We also don’t expect Truly to be gaining share next year with the ever-increasing number of entrants into the category.
Grocery credit card rewards (ACI)
Chase is offering new and existing Sapphire Preferred and Sapphire Reserve Cardmembers two and three times the points respectively on grocery store purchases, up to $1,000 per month. The increased reward rates mean groceries earn the same amount of points as travel and dining. Chase earlier had a three and five times grocery rewards offer for spending in May and June, up to $1,500 per month. The new program will last for six months. With travelers no longer spending on trips, credit card companies have shifted rewards for what customers are purchasing to entice them to stay members. It sounds like the credit card companies believe the shift in spending for food at home will remain elevated for the next six months.
Off-premise strength not enough to drive wine sales higher (STZ)
Consumer spending on domestic wine, including bulk imports, fell 7% in the year ended September. Including imports, wine sales decreased by 9%. Sales in September decreased by 2.5%, as seen in the following chart on the left. Off-premise (which has been the strongest channel throughout the pandemic) wine sales were up 11% YOY in September, as seen in the following chart on the right. Sales of domestic wines through Nielsen measured off-premise outlets (which represent 45% of the volume and 23% of the dollars of the total U.S. wine market) grew 16% in the four weeks ended September 5. The $11-14.99 price points had the strongest growth rate, but greater than $20 grew more than 30%. The strength at the higher price points is one of the top reasons Constellation Brands is selling its lower-priced brands to E&J Gallo. Restaurant wine sales in the 52 weeks ended August 8th decreased 31%. Direct to consumer shipments of wine increased 17% in September, decelerating as more restaurants have reopened.