Emerging markets rebounds (MDLZ)
Mondelez reported Q3 EPS of $.63, a penny above consensus expectations. Organic net revenue grew 4.4%, ahead of consensus expectations of 2.6%. North American organic growth of 6.3% led the other regions but decelerated from 11% in Q2. Europe grew 3.4%, rebounding from the 1.2% decline in Q2 despite weakness in travel retail a 2% headwind. Developed Markets growth of 3.8% (decelerating from 4.1%) lagged the 5.3% growth in Emerging Markets (accelerating from -5.1%). In Emerging Markets, 80% of the division’s revenue base had strong growth trends. In AMEA, organic net revenue growth rebounded to +4.2% from -3.1% in Q2 while operating income grew 16.8%. Latin America grew 3.1%, rebounding from -11.3% in Q2. Retailers restocking during the quarter added 1% to the topline. Total snacks were up 3.1%, with biscuits up 7.8% and chocolate up 5.3%, while gum and candy were down 18.6%. Adjusted gross margins expanded 20bps driven by leverage, pricing, and productivity offset by higher raw material and COVID-19 costs.
Management is guiding EPS for the year to be up 5%, in line with consensus expectations. The guidance on an absolute basis is impressive, given the global pandemic. Mondelez has proven the value of its global portfolio, with some businesses benefiting from some trend changes in snacking while other businesses were negatively impacted by consumers staying at home. The biggest concern has been the company’s emerging markets business, which has now shown rebounding growth. The shares will likely outperform when investors want more emerging market exposure. Our outlook is constructive here, and the company is on our Long Bias list.
Sprouts Farmers Market traffic trends (SFM)
We removed the company from our Best Idea Long list ahead of the earnings report because we were concerned about traffic trends and online competition. Sprouts reported Q3 SSS of 4.2%. The company’s traffic trends took a turn for the worse in September, as seen in the chart below. However, in the subsequent two weeks, traffic notably improved from September levels. The California market has weaker trends than most of the country due to greater restrictions. Sprouts have also dialed back significantly on promotions in important categories like products that have also been a headwind to traffic. Management’s response to the earnings call that lower traffic results from targeting a narrower customer base have us even more concerned about sales trends in 2021. Most strategy changes that involve “firing” the customer do not work out.
US Foods’ optimism doesn’t seem to match results (USFD)
US Foods reported Q3 EPS of $.15 vs. $.65 last year and a consensus of $.17. US Foods reported organic case volume declines of 22.2% in Q3, improving from -40.2% in Q2. Sales declined 10.5% with inflation/mix down 1.6% and case volumes down 8.9%. Revenue from restaurants has tracked flattish week over week at down 10% YOY for the past five weeks, as seen in the following chart. Independent restaurants have been lagging the chains by 4-5%. Revenue from hospitality, which was down 90% as recently as May has improved, has flattened out in recent weeks at down 60%. Management said 55% of traffic for full-service restaurants in June was off-premise compared to 19% pre-COVID-19. Management cited the continued growth in off-premise for their confidence that restaurants in colder climates will navigate the winter months. Management also said the ingenuity of restaurant operators had kept the permanent closure rate at a low level. Management’s Pollyanna comments seemed to contradict the difficult operating conditions, closure rate of restaurants, and the reality that off-premise is not a new incremental business but a less profitable mix shift. The company said it had won $800M of new business by year-end, most likely from closed competitors.
Gross margins contracted 100bps YOY but improved 70bps sequentially. Inflation was up 220bps, driven by beef and cheese. The company reduced its uncollectible accounts reserve by $30M due to better collection efforts than previously anticipated. Operating expenses increased 20bps YOY but improved 100bps sequentially. Included in the results were 20bps of one-time gains. The company’s results bottomed in Q2, but unless case volume trends improve sequentially, the easy YOY comparisons will not matter. The company’s high leverage at 5.9x TTM EBITDA keeps us on the sidelines.
