Albertsons reports upside in Q3, some concerns ahead (ACI)
Albertsons reported FQ3 EPS of $.66, beating the consensus estimate of $.42. Better sales and margins drove the upside. ID sales grew 12.3%, decelerating only slightly from 13.8% sequentially and above the consensus estimate of 10.5%. Management called out the strength in seafood, meat, and floral. Digital sales grew 225%. The company had 6M new households shop at its stores in the quarter as conventional grocers have been among the biggest beneficiaries of the change in food shopping. Management said ID sales trends QTD are tracking up DD%. Guidance for the year was raised to 16.5%, implying a conservative 10% for Q4. EPS guidance was raised to $3.05-3.15 from $2.75-2.85.
Gross margins expanded 25bps ex-fuel, narrower than the 85bps in the previous quarter. Gross margin expansion was driven by improvement in shrink and leverage on advertising and supply chain costs partially offset by 45bps of digital expenses and select investments in price. Adj. EBITDA grew 53% YOY with a flow-through of 20%. The company has been using its elevated free cash flow to repurchase shares, initiate a dividend, and pay down debt. Interest expense savings have reached $77M annualized this year.
Private label sales fell early on in the pandemic but have recovered to 2019 levels above 25% in the last four weeks of the quarter. Management said the driver was the smaller presence on shelves of private label vs. brands as consumers stocked up on goods and emptied the shelves. As inventory levels have returned to normal levels, the private label share has returned to prior levels. Management described the e-commerce business as break-even.
Albertsons’ shares have traded to the highest levels since the IPO after the first lockup expiration passed, with the insiders retaining their holdings. “Our sponsors have indicated they have no intention to sell additional shares at current market prices.” Despite the robust sales growth and continued coronavirus restrictions, some headwinds are ahead with more difficult comparisons, inflationary food pressure, greater price discounts, higher minimum wages, and less fuel benefit.
Cannabis beverages poised to grow (STZ)
In December, beverages had a 2% share of the Canadian cannabis market, as seen in the following chart. In the U.S., beverages are 1 to 1.4% of the market. Beverage’s share in Canada has grown from less than 1% in January with more product launches. Canada has several regulations for cannabis beverages that limit its appeal, including a limit of 10 milligrams of THC per package, no added vitamins or minerals, no nicotine or added alcohol, and limits on caffeine. Canada's current cannabis possession limits allow an individual to carry up to 30 grams of cannabis but only 71 ounces of cannabis beverages (less than a six-pack). Health Canada has launched new consultations that may signal future changes to possession caps for cannabis beverages. The top beverage producer in Canada is Hexo (Molson Coors JV), followed by Canopy Growth (Constellation Brands minority stake). Beverages will continue to grow but are unlikely to be a significant share of cannabis consumption.
On-premise weakened in August (BUD)
According to the Alcohol and Tobacco Tax and Trade Bureau, total U.S. beer production increased 2.1% YOY in August, decelerating from +4.2% in July. Bottle and can production increased by 10.4%, accelerating from +7.8% in the prior month. Keg production decreased by 58%, decelerating from -45% in the prior month. Consumption at the breweries decreased 60% in August, worsening from the -51.6% in July.
