Grocery demand remains elevated, but that is not the foremost concern (ACI)
The week ended Oct. 18, total CPG demand increased to 13% YOY, accelerating 2% from the prior week. Demand is led by the frozen category, which was up 20% YOY, accelerating 2% from the prior week. The meat department accelerated 2% to 14% YOY, while beverage alcohol decelerated 1% to +16%. Grocery spend continues to be elevated. We see more correlation to consumer behavior and restrictions than we do to the incidence of COVID-19 cases, as we described in our grocery themes update yesterday. For a replay of our grocery outlook, CLICK HERE.
Sprouts EPS beat, but traffic is a concern (SFM)
Sprouts Farmers Market reported Q3 EPS of $.52 vs. consensus of $.36, $.04 above our estimate. SSS were up 4.2%, missing consensus estimates of 7.6%. Management attributed the deceleration in sales to lapping a very promotional August and September last year. E-commerce grew 337%, which means in-store comps were negative. The combination of pulling back on promotions and shifting to digital ads from circulars likely led to the loss of customers who are deal focused.
Gross margins expanded 400bps driven by the change in promotions and lower shrink. Management estimates COVID-19 benefited gross margins by 250bps. SG&A deleveraged 200bps due to COVID-19 operational costs. Management guided Q4 EPS to $.36-.40 vs. consensus of $.37 based on SSS, increasing LSD%, which is also below a 4.6% consensus.
We removed Sprouts Farmers Market from our Best Idea list earlier this week primarily because we were concerned about the poor traffic growth during the pandemic and its competitive position online. Both concerns grew over the past two weeks before the earnings report. Management’s response to the earnings calls that lower traffic results from targeting a narrower customer base have us even more concerned about sales trends in 2021. Many strategy changes that involve “firing” the customer do not work out (I’m having trouble thinking of when it did work). I would like to know how long management will accept the loss of traffic, but the new format stores' returns will be crucial in determining if the company should be awarded a store growth multiple in the future.
Heineken prepares for further lockdowns in Europe (HEIA-AMS)
Heineken reported a sales update for Q3 yesterday. Heineken volumes increased 7.1% in the quarter, while overall beer volumes declined 1.9%. Beer volume decreased 2.5% in AMEEE (vs. -15.9% in 1H), increased 2.5% in the Americas (vs. -15% in 1H), decreased 12.3% in APAC (vs. -4.7% in 1H), and decreased 2.4% in Europe (vs. -8.1% in 1H). On-premise declined by 20% in Europe while off-premise increased HSD%, faster than the overall market in most countries. In Mexico, beer volume declined MSD% due to the shutdown and inventory shortages earlier in the quarter. In contrast, in the U.S., beer volume increased in the low-teens as distributors replenished inventories and on-premise improved. Heineken brand volumes increased 28.8% in the Americas and DD% in the U.S. as Mexico resumed beer production. France and Germany are both planning on month-long shutdowns to turn the tide of COVID-19 cases. Europe has a higher mix of on-premise at 35% than in the Americas. Heineken announced that it would look to reduce headcount in its headquarters and regional offices by 20% starting in Q1 to prepare for an extended period of volatility from the pandemic.
In contrast, Carlsberg raised its full-year earnings growth guidance yesterday from -HSD% to -MSD% after reporting Q3 results. Carlsberg sales declined 6.8% in Q3, improving from 16.9% in Q2. Organic beer volumes increased 2.4% in Q3, with momentum continuing into Q4. Management cited improvements in Russia and China and cost-cutting providing enough visibility to raise expectations despite looming lockdowns. We recently lowered BUD on our long bias list due to an outlook for further on-premise restrictions delaying the recovery that has been underway.