We are hosting a Q&A call today at 2 PM to answer questions in the Restaurants & Consumer Staples sectors.
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Kroger analyst day review (KR)
Kroger hosted an analyst day yesterday outlining its growth plans over the next few years, driven by online growth. There are several changes to consumer behavior that management believes will be long-tailed changes, as seen in the slide below.
Digital growth
Management said digital sales in the next few years would grow at a rate 5x more than they did in 2019. The pass-through profit rate of digital is expected to double by the end of 2023. Management was up-front about the slow ramp-up of Ocado's profitability. Ocado is expected to be a headwind to operating profit in the early years as volume ramps up, but by the third year, site profitability is targeted. By the fourth year, the profit rate is expected to be on par with the store operating margin.
Inflation debate
Management said they expect food inflation to be 1-2% this year with deflation in meat. Currently, there is deflation in produce and pockets of inflation that are weather-driven, according to Kroger. Kimberly Clark announced yesterday that it raised list prices by mid to high single digits to offset inflationary pressures. Corn and soybean prices gapped up yesterday, with the WASDE report estimating fewer acres planted than the market thought. The higher feed prices did cause cattle prices to fall on the expectation that ranchers would reduce their herds due to the higher cost to feed (a short-term deflationary impact, long-term inflationary). Hog prices continue to increase due to China’s growing imports. Consumers may not be willing to pay higher prices, but inflation is coming, and someone in the channel will have to absorb it.
Kroger is a Best Idea Short
Kroger is likely the best operator in the conventional grocery sector. Still, the business's headwinds outnumber the tailwinds as the onset of the pandemic is anniversaries and vaccine rollout. The grocery sector is the most competitive of retail sectors, and the shift to at-home meal consumption was an atypical reprieve of competitive intensity. As sales to the sector decrease, the competitive intensity will increase with the return of promotions and accelerating capital investments. The outlook for both SSS and gross margins is negative for at least five quarters. The current valuation is at the high end of the historical range despite the coming shift in where meals are consumed.
The boost from a return to stadiums (BUD)
The NFL approved the addition of one game to its 16 games regular-season schedule. The season will begin on September 9. The NFL Commissioner Roger Goodell said he expects the stadiums to be filled for the 2021 season. An in-person football season would be a significant boost to on-premise consumption. Viewership last year was down 7% for NFL games, the lowest average audience since 2017. Most sports viewership has declined without in-person attendance. Bud Light is the biggest advertising spender in the NFL at more than $200M annually. According to a survey of NFL fans conducted by alcohol.org, NFL fans consume many drinks watching games, as seen below.
UK grocery sales fall (NOMD)
Kantar reported that British grocery sales fell 3% YOY in the four weeks ended March 21. The deceleration from 15.1% in the previous month is due to the comparisons against the stockpiling beginning last year. Online grocery spending was 89% above the prior year, but the share of grocery spend dropped to 14.5% from 15.4% last month. The drop in spending was from the 65 years and older demographic, who is now largely vaccinated. Kantar said grocery inflation was 0.9% over the prior 12-week period. For the week ended March 21, IRI reported CPG demand fell 24% YOY while frozen food demand fell 37%, as seen in the following chart. While the U.K.’s vaccination rate lags the U.S., it is ahead of continental Europe, considering additional restrictions again as COVID-19 cases rise. This will drag out elevated at-home eating in Europe in 2021. The UK is Nomad Food's largest country by sales, representing 31% of overall sales (before the Fortenova frozen food acquisition).
