Visible recovery (LW)
Lamb Weston reported FQ3 EPS of $.45, below consensus expectations of $.51. Revenue was above expectations while margins were lower due to higher manufacturing and distribution costs. The manufacturing costs were related to the pandemic. Sales declined 4%, with volumes down 6%, and price/mix was up 2%. That represents a sequential improvement from a 12% revenue decline in FQ2 despite additional restaurants' restrictions in November. The global segment saw a sequential improvement from -12% in FQ2 to -2% in FQ3, largely due to improved international shipments. The foodservice segment decelerated slightly from -21% in FQ2 to -22% in FQ3. The non-commercial segment remained down by half. Sales to retail customers increased 23%, accelerating from 7% sequentially.
Management provided an update on the first four weeks of FQ4. Compared to 2019, shipments were 10% lower. Shipments to large chain restaurants were 15% lower and are expected to remain at that level for the remainder of FQ4. Shipments to foodservice customers (full-service chains, independent restaurants, regional and small QSRs, lodging, hospitality, schools, sports, and entertainment) were 10% lower. The weak demand at non-restaurant customers was offset by inventory restocking. Management expects the current level to remain similar for the rest of the quarter. Shipments to retail customers were up 10%. Retail demand is expected to decline gradually. In Europe, Lamb Weston’s JV had shipments 15% below 2019 levels. In the other key markets, shipments were 25% lower than 2019 levels. Management expects demand to return to pre-pandemic levels by the end of 2021. The laggards continue to be Europe and non-commercial demand, but recovery should be visible in two quarters.
Lamb Weston is on our Long Bias list as a beneficiary of the recovery in away from home meal consumption. The acceleration in the rollout of the COVID-19 vaccines will hit a critical point in a few months in changing consumer behavior.
Starbucks is running short on Oatly (STKL)
SBUX is a LONG on the Restaurant Position Monitor
Articles this week have cited shortages of oat milk at Starbucks, which the company confirmed. “As more customers return to our stores, some customers may experience a temporary shortage of oat milk at their store. We apologize for any inconvenience to the customer experience and recommend trying soy milk, almond milk, or coconut milk. Customers will have oat milk available in their store soon.” Starbucks did not attribute the shortage to specific beverages' popularity, but that new launches this spring have resonated. It was never clear to us how Oatly would effectively supply Starbucks’ national oat milk rollout this year because Oatly was already a short product. Oatly’s current production challenges and growing demand have made shortages worse.
With Oatly supplying Starbucks’ ~15,000 stores in the U.S., Oatly’s supply would have to be diverted from the retail channel. Oatly has undertaken an expansion at its New Jersey location that will add much-needed supply in the East Coast when it opens, but that is still months away. SunOpta already supplies Starbucks with all the other plant-based beverages it uses. SunOpta also has better (but not full) national coverage with its plants, reducing shipping expense and time. Starbucks rarely features another brand on its menu. The decision to choose Oatly as the supplier seems to have been influenced by Starbucks founder Howard Schultz being an investor in Oatly. Oat milk retail demand will likely be met by SunOpta supply if Oatly is missing on grocers’ shelves. Ultimately the awareness of oat milk from Starbucks is a demand driver directly or indirectly for SunOpta.
Plant-based milk sales (STKL)
Sales of plant-based foods that directly replace animal products grew 27% in 2020 to $7B in measured channels, according to SPINS. The figure excludes retailers who do not share their data and sell plant-based foods, including Whole Foods, Trader Joe’s, ALDI, convenience stores, and Costco. The largest category of plant-based foods by far is plant-based milk at $2.5B. Plant-based milk sales grew 20% in 2020, accelerating from 11.4% in 2019. The U.S. household penetration rate for plant-based milk is 39%. Plant-based milk represents 15% of fluid milk sales and 45% of fluid milk sales in natural food stores. Almond milk represents about 2/3 of the plant-based category. Almond milk sales grew 16.9% to $1.59B in the 52 weeks ended Jan. 24. Oat milk sales grew 219% to $264M in the same period. Soy milk, now in third, fell 0.9% to $201.4M. Coconut milk grew 25.9% to $134.6M. Plant-based milk sales accelerated during the pandemic like most CPG categories, but the category will continue to grow in 2021, unlike most CPG categories.
