Topics this week…Consumables Corner – 1) U.S. store growth is full steam ahead, with discounters leading the way, 2) Discounters tend to bring down prices in surrounding areas, and 3) BJ’s earnings preview Amazon A to Z – The meal delivery trend shows no signs of slowing with Amazon’s recent investment in Deliveroo Quote of the Week – Home Depot CFO, Carol Tomé, on the U.S. housing market
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If WMT can repeat its 1Q20 performance going forward without slowing sales, there could be significant upside to our estimates. From our perspective, however, we think that in order to maintain the level of sales Walmart is experiencing, the company will likely need to invest more in price, more in wages, and more in ecommerce logistics with 1-day shipment and assortment. As we discussed in our post-earnings note and downgrade to Underperform, central to our thesis is that WMT is mining its U.S. store fleet to fund ecommerce initiatives abroad and that many of the benefits experienced are likely to fade as price gaps to competition begin to slow traffic growth in the core U.S. business. Indeed, the quarter was marked by a surprisingly profitable Walmart U.S., partially offset by a surprisingly less profitable Walmart International.
SPTN reported 1Q19 earnings on Monday 5/20 before the market open (preliminary results were released on 5/9). As we had previously highlighted, company-specific challenges (voluntary recall of fresh-cut melon products, operational issue at one of its distribution facilities, etc.) are likely to have an outsized impact on SPTN’s profitability this year. Add to this a tough operating environment, including competitive price pressures and benign inflation, especially on the retail side of the business, and we see a tough road ahead for the highly experienced senior leadership team at SPTN. The team has hired outside consultants to improve the profitability of its Fresh Kitchen operations and has also hired a new Chief Marketing Officer and new Chief Information Officer. Coupled with further upcoming senior management appointments including a new President of Distribution, and the team seems to be focused on trying to eke costs out of its supply chain, as freight and labor costs continue to inch higher. Balancing a challenging operating environment with a valuation that remains reasonable, we are Peer Perform rated on the equity. The equity was down -1.4% on Monday.
Our total Walmart basket is up very slightly from the prior week, with the largest changes being potato chip price increases (+12.6% sequentially, -1.3% y/y) mostly offset by pretzel price decreases (-7.8% sequentially, -5.2% y/y). Our total Walmart basket remains up y/y (+1.0%) driven primarily by HPC (+1.8% y/y) and Pet (+4.4% y/y). Of note, CPB continues to face difficulty on the pricing front, and although the move in pretzels is seasonal, the price decrease for the spring/summer seasons this year happened later and is around 7% below last year’s spring/summer decrease. Coupling this with our view on the difficulties facing the company in its core soup category and we remain Underweight rated on CPB ($32 PT), which is set to report its 3Q19 earnings on 6/5.
Topics this weekend…
Walmart’s World – WMT’s 1Q20 was strong, but we think is supportive of our underlying Underperform thesis longer-term
Amazon A to Z – Pedal to the Metal
Hardlines Happenings – Tariff impact analysis on HD, LOW, and BBY
Target’s Tidings – TGT earnings preview
Quote of the Week – Ford CFO Time Stone’s comments on AMZN/Whole Foods
Management’s efforts to revitalize its core U.S. business by focusing on growing its largest and most profitable brands and to rationalize its portfolio by discontinuing and divesting non-core assets seems to be succeeding, but it is certainly a long road ahead. As the largest manufacturer of on-trend natural and organic products and the largest supplier into Amazon’s Whole Foods, further business stabilization could result in a higher equity price. That said, total sales are not expected to grow until FY22, and margins will need to significantly expand in order to grow absolute profit dollars and returns. Additionally, HAIN’s divestiture of Pure Protein for $80mm was well below our expectation, and we need to acknowledge the risk that future asset divestitures are priced lower than expected.
Walmart reported 1Q20 earnings this morning (5/16/2019) before the market opened with U.S. comps of 3.4% (in line with our and Consensus estimates) and Adj. EPS of $1.13 (above our and Consensus estimates of $1.02). Walmart U.S. EBIT came in above our expectations ($4.1bn vs our $3.8bn), Sam’s Club EBIT was above our expectations ($0.5bn vs our $0.3bn), and International EBIT came in below our expectations ($0.7bn vs our $1.0bn). In Walmart U.S., gross profit rate expanded 6 bps and operating expenses leveraged 10 bps. Guidance for the full year was reiterated. The equity is up approximately 2.7% as of 12:00pm ET following the report.
Topics this week…
Walmart’s World – 1) Is Walmart underinvesting in labor?, and 2) 1Q20 Earnings Preview
Consumables Corner – Birth rate data hits lowest level since 1986
Amazon A to Z – 1) Amazon has best-in-class shipping, and 2) Amazon is unrivaled in fulfillment
Quotes of the Week – Amazon is supporting employees starting their own package delivery businesses
THS reported 1Q19 earnings on Thursday 5/2 before the market open. Sales came in below expectations with better-than-anticipated margins leading to a ~4% EBIT beat versus our estimates, but slightly below Consensus. As we have previously written, THS continues to choose margin rate over growth, and lower volumes are leading to shrinking profitability. Indeed, THS announced plans to sell its $260mm ready-to-eat cereal business to Post Holdings (POST, Not Covered) and to close its Minneapolis Snacks facility by the end of 3Q19. THS will update its 2019 full year guidance (previously provided in the 4Q earnings call in February), with its 2Q19 results in early August, along with its conclusions on the underperforming Snacks business. In-part driven by the further pruning of its businesses, the equity has been under pressure since its results and is down -13% through 5/13. All that said, while we expect 2019 to be an extremely challenging year for THS (we are reducing our FY19 EPS by 6%), we expect the pruned-down business to achieve some profitability growth in 2020. Balancing near-term challenges with a valuation that appears favorable, we are maintaining our Peer Perform rating.
Walmart today (5/14/2019) announced that it would offer free NextDay delivery to Walmart.com customers in Phoenix and Las Vegas and expand to Southern California in the coming days. The company plans to expand the service to reach approximately 75% of the U.S. population this year, including 40 of the 50 top major U.S. metro areas. There will be up to 220k SKUs available, with additional assortment to be added, and will be available on eligible orders of $35 or more. Walmart also stated that it will cost less to deliver orders the next day because eligible items come from a single fulfillment center located closest to the customer.
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