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.
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Duncan stressed that exclusive agreements are “conditionally exclusive” and that there are clauses in each contract that incentivize partners to continue growing the channel.
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.
Target reported solid topline results in 1Q (ended April) but margins were under pressure as the company faced headwinds from unfavorable channel and category mix shift. 1Q print was better than the company’s preannouncement (on 4/23) that called out QTD comps of +7.0% (vs. +10.8% for all of 1Q) and more than 500bps of operating margin compression (vs. 400bps for all of 1Q). We will look for additional color on 2Q to date trends and gross margins during the call that begins at 8AM EST.
Walmart reported solid F’1Q results (ended April) with US comps coming in ahead of expectations and strong momentum continuing into May (although recent strength has been driven by stimulus checks and trends could moderate in F’2Q). Walmart saw $900mm in incremental costs associated with COVID-19 ($670mm in the US) and management expects that to be a good run-rate for 2Q. Ecommerce also picked up as expected with US ecommerce up +74%, but importantly losses moderated (benefit from mix shift to general merchandise). 1Q results indicate that Walmart’s years of online investments are starting to pay off with COVID driving share gains for Walmart.
We recently conducted checks across the meat supply chain from farm to store – below are our key takeaways: 1) Grocery sales remain elevated May to date up +10-20%, with the meat category outperforming the overall store in the last week; 2) Protein supply at the wholesale level has improved after bottoming at the end of April and 3) Processing plant output could be down 20-30% currently and we’d expect some lingering disruptions from new safety measures.
A large organic/natural food retailer (NGVC) reported elevated sales in April with trends continuing into May (comps up +17%), which we think is likely a positive readthrough to our broader food retail coverage (especially for pure play grocers). Importantly comp trends in states that have started to reopen haven’t seen a significant deceleration. Guidance does imply significantly less flow through of sales growth over the next two quarters as there is some unfavorable mix shift from online orders and incremental labors costs.
Ahold 1Q results saw US adj comps (ex-FX/Fuel) up +14. 6% with a +34.2% increase in March and sales remain elevated in April (although lower than March). The company also reported margin improvement in the first quarter with US operating margins up +180bps YoY, but management is still expecting margins to be flat for the full year. Online will also be a bigger focus in 2020 and Ahold is pulling forward its roll out of click & collect locations to meet demand.
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