Diageo sees premiumization continuing, late to hard-seltzer (DEO)
Diageo reported 1H EPS of 69.9p, above consensus estimates of 67.8p. The upside was driven mostly by higher revenue. Organic sales growth was up 12% in North America and down in the other regions with Europe & Turkey -10% and Asia Pacific -3%. The revenue beat consensus expectations in every region led by Africa and Latin America & the Caribbean. By category, sales were led by tequila and gin, which have been boosted by Don Julio, Casamigos, and Aviation Gin's acquisitions. Scotch decreased 8%, but excluding travel retail, was flat. Management continues to expect premiumization to continue in spirits. The company’s super-premium brands grew 14% vs. a 9% decline in its premium brands. Beer was the weakest as seen in the following chart with the business down 34% in Europe & Turkey. Excluding on-premise beer was up 1%.
Management said they expect to see continued momentum in North America as they lap the onset of COVID-19. The company will also start to lap the inventory reductions by distributors. Travel retail is where management continues to expect weakness. In the next two quarters, management expects profits to grow faster than organic sales except in North America, where it experienced strong margins last year. In the U.S., management sees several trends, including consumers treating themselves, trusting big brands, and paying for convenience (pre-mixed cocktails). Management targets the growth in hard seltzer with single-serve cocktail drinks like Ketel One Spritz and Crown Royal single-serve by getting consumers to trade up.
IPO canceled (SEGR)
Southeastern Grocers, the parent company of Winn-Dixie, announced that it was canceling its IPO last night. “The company will continue to evaluate the timing for the proposed offering as market conditions develop.” The company was looking to sell some $130M of secondary shares in its public offering. What appealed to us was the company’s local market penetration, store remodels program, market demographics, and the recent changes to the corporate structure. On the other hand, it competes in grocery, is about to lap the COVID-19 driven sales boost, and will soon see inflationary headwinds. A 2% store growth rate plan probably was not attractive enough for investors, given the comparisons in the tables below.
The timing of the IPO was probably too optimal. The company was going public the quarter before it was going to lap the pandemic comparisons. We thought Albertsons' timing was as good as it gets for grocers, but it took six months before it traded above the IPO price. You can time an overnight secondary offering (AMC) during a market short squeeze of epic proportions, but not an IPO. The pulled IPO should be seen as a green light for hedge funds to re-short grocers heading into the pandemic comparisons.
Boxed wine catching on (STZ)
Consumers have been increasingly interested in a bag in a box packaging for wine, with sales outpacing bottled wine in 2020. Canned wines and single-serve have not fared as well. Driving the interest in a bag in a box has changed consumers’ shopping habits, drinking occasions, lifestyles, environmental concerns, and demographics. As the packaging has grown, wineries have responded with higher quality wines at more affordable prices, further driving growth. Boxed wine as a package is much cheaper than a bottle. The transportation costs are also lower due to more volume per container (fitting twice as much on a truck), less breakage, and less weight. Wine in an open box can last two to four weeks refrigerated compared to 3-7 days for a bottle. Constellation Brands sold Black Box to E&J Gallo earlier in the month, but it appears the company is still interested in the packaging. Constellation Brands has received packaging approval (but not launched) for Robert Mondavi Private Selection Buttery Chardonnay and Cabernet Sauvignon Boxed Wine, Ruffino Pinot Grigio Boxed Wine, and Ruffino Rosso Boxed Wine.
