Earlier today (3/26/19), we toured Amazon’s Edison, NJ fulfillment center that opened in October 2017. Codenamed LGA9, the relatively new facility is approximately 1.2mm square feet and employs around 2,000 full-time, part-time and seasonal employees. LGA9 is an AR (Amazon Robotics) sortable building – that is, it only deals with smaller-sized order items (max 18 inches in length and weighing under 25 pounds). The facility deploys 250-pound rechargeable robots that can carry package bins weighing up to 1,500 pounds.
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This week's topics include:
The Consumables Corner: General Mills (GIS, Not Covered) reported results that were well received last week.
Hardline Happenings: Hit Pause. Hit Refresh? Not Yet. A look at existing home sales and the housing market.
Walmart's World: Walmart thinks it has won the price war, we think differently.
A to Z - Amazon Roundup: (1) Amazon’s Prime Video continues its sports streaming binge; and (2) Prime Video movie rentals are being sponsored by CPG, combining two powerful revenue and profit streams for Amazon.
Costco is clearly, in our opinion, a unique, one of a kind franchise that is thriving with the strong consumer backdrop, particularly in the U.S. Indeed, the company’s strong 2Q results reported on March 7th prompted us to take another look at our rating and possible catalysts for further sales/margin upside. Our analysis did yield expectations that core gross margins could be more stable due to indications that its main competitor, Walmart’s Sam’s Club, may have relaxed its price stance to a degree. The idea of better margins, however, appears to have quickly been reflected in the equity price. Further, while we do have a slightly more constructive view of margins in the near-term, if we had a bias over time it would be that margins could see more pressure than expected as some warehouse sales move online and additional omnichannel investments are needed. Balancing a superior business model that is generating strong sales, against a hefty valuation and the longer-term uncertainties around the true cost of the omnichannel efforts, we are maintaining our Peer Perform rating.
This week's topics include:
Target's Tidings: Target’s remodels continue to impress while consumables execution continues to depress!
The Consumables Corner: With too many assets chasing too few sales, the in-home consumables retailing industry remains difficult.
Hardline Happenings: Hardline retailers stand to benefit from both ends of the demographic spectrum, in our view.
Walmart's World: The methods for discounting by consumables retailers appear to be multiplying by the week.
A to Z - Amazon Roundup: (1) Instagram is becoming an ecommerce marketplace...one without private label competition; and (2) Amazon pushes further into consumables with another private label brand.
DG reported 4Q18 earnings yesterday morning (03/14/19) that were relatively in line with estimates. However, the equity sold off hard as strong comp sales were offset by significant gross margin contraction and FY19 guidance introduced by the company came in below expectations. While the near-term appears more challenged as investments into the business pressure gross margin and SG&A, we remain more focused on, in what our opinion, is a robust long-term outlook. Indeed, management is pursuing several initiatives such as the expansion and self-distribution of fresh products, that should grow sales and EBIT per square foot, and improve returns. Combine this with DG’s solid comp performance given the historical countercyclicality of the business versus the strength of the current economy, plus its strong FCF growth and high ROIC, and we see an opportunity knocking. As such, we are strongly reiterating our Outperform rating.
Kroger held a breakfast meeting this morning (3/14/2019) to introduce the sell-side community to Gary Millerchip, who is set to assume the Kroger CFO role on April 4th, and is currently the CEO of Kroger Personal Finance. Also in attendance were long-time CFO Mike Schlotman; SVP, Alternative Business, Stuart Aitken; Director of Investor Relations, Rebekah Manis; and the recently hired Sean Parker, who will be focusing on financial communications for Kroger.
DLTR announced that it would introduce new tests for a multi price-point strategy at Dollar Tree, close 390 underperforming Family Dollar locations, and provided metrics for the 1,000 remodels it plans to introduce to the Family Dollar store base. We view the concession on price strategy as bending the buck, as the test seems as though it will be limited to stores served only by distribution centers with capacity to fulfill both Dollar Tree and Family Dollar. Simultaneously, the company plans to remodel approximately 12% of the Family Dollar stores into the new H2 concept, which includes more refrigerated / frozen foods as well as $1 merchandise. If the H2 models truly drive over 13% comp growth, there may be upside to estimates. However, in the near term, the Family Dollar business is experiencing significantly deteriorating gross margin coupled with rapidly growing inventory, which in our opinion may be indicative of larger issues at the banner. While a good start, it is too early to call a turnaround in Family Dollar based on remodel plans, and we are maintaining our Peer Perform rating on DLTR.
Investment summary. Kroger’s 4Q earnings revealed a continuation of the sharp deterioration in core grocery profitability. Stepping back, KR is fighting a multi-front battle as it competes with more Walmarts and ADLIs than any other retailer, faces strong regional competitors like HEB in Texas, and confronts a sizable and growing threat from Amazon/Whole Foods. If this were not enough, KR is also investing heavily to deliver an omnichannel experience, and, like competitors, it struggles with earnings dilution from this effort. Clearly management is working hard to offset these pressures by growing alternative revenues/profits, which saw significant gains in 4Q. This is concerning, in our view, as the total enterprise still saw a meaningful reduction in EBIT. Given the competitive pressures, the continuing omnichannel and labor headwinds, and the lack of visibility on alternative profits, we are reiterating our Underperform rating and reducing our price target to $22.
BJ’s 4Q18 earnings this morning were better-than-anticipated as earnings came in above estimates and the company posted comp sales growth of 2.9% in the quarter.
Supervalu is clearly not earning what UNFI thought it would. With higher-than-anticipated expenses in the distribution center realignments and optimization projects, EBITDA continues to fall short of expectations. Complicating matters are the macro environment for food retail with store closures, slow traffic growth, and rising costs. Adding to the challenges facing the core businesses, management is undertaking an incredibly complex strategic realignment, seeking to divest non-distribution assets, consolidating distribution centers, all while managing a high debt burden that comes at a higher interest rate than it originally planned for when it made the acquisition. We continue to view UNFI as binary with a more negative bias and are maintaining our Peer Perform rating.
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