Grocery takeaways from the largest competitor (ACI)
The largest food retailer’s earnings reports have numerous takeaways for the grocery sector. Walmart’s (covered by Hedgeye’s Brian McGough) U.S. SSS increased by 6.4%, ex. fuel in Q3 with transactions down 14.2% and ticket up 24%. Walmart’s traffic has been negatively impacted by the reduction in operating hours during the pandemic. Placer.ai’s traffic counts show an improvement in October, with Walmart’s traffic improving to -7.6%, as seen in the following chart.
Walmart said comp sales accelerated from August, helped by the food category, which was up to mid to high single digits. Walmart cited strong comp sales in food categories helped by expanded store hours, improving in-stock levels, and its price positioning. Management said there wasn’t much change in the promotional in Q3 from Q2 for food and consumables. The acceleration in Walmart’s SSS did not cause a notable deceleration for Albertson’s, which reported on Oct. 20th that comps month to date were up low double digits. Kroger reported on Sept. 11 that comps QTD were up double digits. Kroger cites Walmart as the food retailer with the most overlap with its store network. Walmart said its price gaps relative to the competition widened in Q2 and remained the same in Q3 as other grocers pulled back on promotions. It is notable that Kroger’s gross margins only expanded 5bps in the most recent quarter and management cited the competitive environment’s promotional level.
In Canada, SSS increased 7%, with Walmart citing strength in food and consumables. Loblaw reported an SSS of 6.9% last week but noted an uptick in promotions.
Chocolate bar maker moves into healthier bars (SMPL)
Mars announced yesterday it would acquire the rest of the snack bar brand Kind. In 2017 Mars acquired a minority stake in Kind that valued the company at ~$4B. The acquisition price values Kind at ~$5B. Current revenues are estimated to be $1.5B, up from $1B three years ago. Many large food manufacturers have a snack bar brand, including Kellogg’s Rxbar, General Mills’ Nature Valley, Hershey’s One, and Mondelez’s Perfect Bar. Last year the founder of Kind said the introduction of similar snack bars had taken a toll on its sales. Mars is expected to improve Kind’s supply chain, logistics, warehouse, and distribution capabilities. Kind has recently expanded its product offering beyond snack bars and is pursuing international growth. Health and nutrition bars have been taking share from cereal and granola bars for the last several years, a trend Simply Good Foods has benefited from. Then COVID-19 hit, and most people were no longer “on the go.” Working from home has depressed meal replacement demand and increased home meal preparation. SMPL is on our short bias list.
Pepsi is fired (PEP)
Bang Energy announced yesterday that it ended its exclusive distribution agreement with PepsiCo, months after signing the agreement. VPX Sports, the parent company of Bang Energy, said in its letter, “Bang Energy has had, and continues to have, a remarkable 11-year relationship with many of its prior distribution partners, including the independent Pepsi bottlers. Therefore, we sincerely expected PepsiCo to execute at an even higher level based on their enormous resources and promises. Unfortunately, we were wrong. PepsiCo, you’re fired.” In response, PepsiCo said it would remain the exclusive U.S. distributor of Bang Energy drinks through October 2023. This year, Bang Energy sales were up from $345M in retail sales last spring to $1.1B. In the year ended Mar. 22 (pre-pandemic) Bang’s sales grew 136%. After Q1, sales fell 1.3% to $1.09B in the 12-week period ended Oct. 31, according to Nielsen. PepsiCo’s energy drink sales have declined by 12.5% in the most recent 12-week period.
PepsiCo has made a series of moves this year in the energy drink space. In March, PepsiCo acquired Rockstar Energy for $3.85B, which allowed it to end an exclusive distribution agreement and expand its portfolio. In April, PepsiCo signed the distribution agreement with Bang Energy and entered into the fitness energy drink market. At the time, Bang Energy said, “The combined power of our two organizations will be a meteoric partnership – one for the beverage history books.” PepsiCo is on our long bias list.
