Kroger stares down peak comparisons (KR)
Kroger reported FQ3 EPS of $.71 vs. consensus of $.67. ID sales ex.-fuel grew 10.9%, above consensus estimates of 9.3%. Digital sales grew 108% and contributed 4.6% to ID sales. During the current wave of lockdowns, the company is seeing further traffic declines offset by larger baskets. The week of Thanksgiving decelerated compared to the first two weeks of November. Taken together, November tracked at similar levels seen in FQ3 despite the new round of lockdowns.
Gross margins, ex. Fuel contracted 2bps despite robust sales growth. Management said price investments and mix changes offset sourcing efficiencies, sales leverage, and growth in alternative profit streams. Management explained that price investments were personalized promotions in categories like fresh food rather than broad discounting. Sales leverage, lower shrink, and the growth in alternative profit streams should be meaningful, while lower sales of prepared foods and targeted prices through loyalty plans seem limited. Until the company can explain the magnitude of the headwinds and tailwinds better, the lower margins from e-commerce are the obvious answer. Management said, “digital profitability improved” and “digital sales are incrementally profitable today,” but they were not cited as a margin drag. Management’s obfuscation on digital margins is one of our largest concerns.
Kroger is a Best Idea Short. See our separate note for more details.
New craft brewers continue to open (SAM)
The Brewers Association reported that 8,386 breweries were operating at the end of 2019. Breweries were opening at a rate of 2.5 per day last year. Despite the pandemic and lockdown restrictions, new breweries still managed to open in 2020. The Brewers Association counted about 550 new openings in 2020, down 30% compared to the YTD period in 2019. New breweries are on pace for 700 openings in 2020. The fact that so many are still opening likely means that craft brewers have switched to off-premise delivery, outdoor seating. At the same time, the weather accommodated it, and distribution to packaged good stores. Small craft brewers can also operate with skeleton staffing. Craft beer is no longer gaining share in off-premise this year, in large part due to the gains in hard seltzer. When on-premise opens up again, craft beer is probably poised to more likely to gain share than lose share.
Grocery remains elevated during 2nd U.K. lockdown (NOMD)
In November, England was in its second lockdown, which led to an acceleration in CPG sales from October. The frozen food category was a flat week over week at +16% for the week ended November 28. Beverage alcohol sales were the strongest categories for the week and have been for much of the second lockdown. The U.K. has a higher share of on-premise alcohol consumption than the U.S., so lockdowns lead to more of a shift. In contrast, most of Europe has lower food away from home consumption than the U.S., so lockdowns have less of a benefit for grocery purchases.
Nomad Foods has seen sales accelerate with the second wave of lockdowns in Western Europe. The company’s Nielsen tracked sales accelerated to +double digits so far in Q4 compared to +7% in Q3.
