Ahold announced another bolt-on M&A deal where it will be acquiring 62 stores from Southeastern Grocers. The deal will allow it to infill some rural areas in Georgia and the Carolinas while capitalizing on the strength of the Food Lion banner. We think this deal fits well with its strategy of consolidating the fragmented food retail industry through thoughtful M&A (we discuss this in detail in our May 28th initiation) and should draw on its solid track record of successful integration (e.g. Delhaize acquisition in 2016).
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Costco reported May sales that we think will likely assuage some investor concerns about a prolonged traffic slump. In the US, traffic improved sequentially to -4.8%, which was a significant improvement from the -16% decline in April during the peak of the COVID crisis. Discretionary comps also showed signs of improvement with hardlines/softlines comps both solidly positive in May. We think the consumer trend towards combining shopping trips will benefit retailers like Costco that allow its members to shop for their entire home in one trip. This trend could set Costco up well for market share gains.
Shift to digital business likely accelerated by the COVID crisis but management is working to quickly adjust cost structure to adjust to the shift away from studio. The transition could lead to some noisy quarters but underlying trends are strong.
Duncan stressed that exclusive agreements are “conditionally exclusive” and that there are clauses in each contract that incentivize partners to continue growing the channel.
Stop & Shop turnaround was on track pre-crisis and sales have accelerated, as expected, with coronavirus outbreak. Turnaround at this banner remains one of the biggest concerns for investors but our survey indicates some signs of improvement.
Costco reported somewhat mixed results in F’3Q as soft traffic related to store restrictions and department closures weighed on results. Encouragingly US/Canada renewal rates ticked up (could be some volatility going forward) and operating margins improved slightly despite incremental COVID costs. We think that investors remain focused on traffic trends and are likely to look to the May monthly sales release for signs of improvement as warehouse restrictions ease (US traffic down -16% in April and -2% for all of F’3Q).
We are initiating coverage of Ahold Delhaize with an Outperform rating. While the industry is in flux, we think Ahold is well positioned to use its scale to navigate through the crisis and exit with significant share gains. We’d expect the company to deploy its robust FCF for opportunistic share repurchases/M&A and to fund eCommerce initiatives, which should drive improved comp momentum. Our proprietary Stop & Shop survey also indicates that the banner continues to see improved trends.
Following recent earnings reports across leisure, food retailers, and hardlines retailers, we are publishing updated estimates and price targets for each of the following: Norwegian Cruise Lines (NCLH), Royal Caribbean Cruises (RCL), Walmart (WMT), Sprouts Farmers Markets (SFM), Advance Auto Parts (AAP), AutoZone (AZO), Home Depot (HD), Lowe’s (LOW), Wayfair (W).
We conducted a proprietary survey of over 100 supermarket managers to get their thoughts on the industry. Below are our key takeaways:
BJ’s reported solid 1Q results with comps increasing +27% and exited the quarter north of 20% growth (trends continuing QTD). We think the results highlight the impact of BJ’s store locations that are predominantly in the northeast (which has seen outsized impact from COVID-19), warehouses with significant capacity for growth (e.g. ~26k members per store at BJ’s vs. Costco at ~60k) and a sales mix that is non-discretionary at 85% grocery.
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