Our Walmart CPG price tracker through last week shows a continuation of price cuts, especially in Food. Our Food basket is flat sequentially and down 1.1% y/y, while our HPC basket is down 0.3% sequentially and up 0.9% y/y. For U.S. based food companies, we continue to see risk around the pricing environment if Walmart reinstates a new round of price cuts.
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SPTN reported 2Q19 earnings on Wednesday 8/14 after the market close (preliminary headline results were released on 8/12). On 8/12, SPTN also announced a leadership transition, naming its former CEO (and current Chairman of the Board) Dennis Eidson as interim CEO (replacing Dave Staples). SPTN’s revenue and profitability growth remains subdued, while the pricing environment, in our opinion, is likely to get tougher before it gets better (see our Midweek Musings – Here We Go Again…). Supply chain costs continue to come in higher than anticipated and the Military business profitability continues to diminish. If the new leadership team at SPTN is able to address and overcome some of these challenges in the next few months, the company could see an improvement in its margin profile. That said, balancing the company-specific issues and a tough industry climate with a valuation that appears to be reasonable, we remain Peer Perform rated on the equity.
Topics this week…
Consumables Corner – 1) Walmart appears to be implementing prices cuts, 2) CPI and PPI data continues to spell bad news for grocery retailers, and 3) SPTN earnings preview
Walmart’s World – WMT earnings preview
Quotes of the Week – Grocery Outlet (GO, Not Covered) Vice Chairman, MacGregor Read, on store expansion
This morning (8/12/19), SpartanNash announced the appointment of Dennis Eidson to the roles of interim President and CEO following Dave Staples’ resignation, effective immediately. Dave Staples has been CEO of SPTN since 2017, however, Dennis Eidson was previously CEO from 2008-2017. The company also announced its decision to exit its Fresh Kitchen operations, which were acquired through Caito Foods in 2017. Further, SPTN released preliminary 2Q19 results for net sales ($2.00bn vs our $2.04bn and Consensus of $2.01bn) and adj. EPS ($0.34 vs our $0.40 and Consensus of $0.37) and lowered its FY19 guidance for EBITDA and adj. EPS.
Ahold’s 2Q19 EPS came in ahead of our estimates and beat Consensus, with sales and EBIT in line with Consensus. The soft U.S. comp of 0.2% (also in line with Consensus) included an approximately 3.1% impact from the Stop & Shop strike, but the company’s ongoing focus on cost control and outperformance in its other U.S. banners offset the EBIT impact from lost sales, with the U.S. EBIT margin of 3.5% ahead of our 3.2% estimate. In the face of 1) lost sales from the strike and a subsequent recovery period as well as 2) a tough competitive environment in food retail, Ahold gained market share in its key U.S. East Coast region – highlighting to us the strength of the experienced Ahold leadership team (for further details on the shareholder-aligned management team, please refer to our initiation). Stepping back, the company is well positioned on price and likely to see good sales growth as it significantly refreshes its U.S. store base.
Topics this week…
Consumables Corner – Southern California pricing data shows heavy deflation in the fresh category
A to Z – Amazon is having more of an impact on the consumables industry than most realize, in our opinion
Quotes of the Week – Ahold Delhaize (AD-NL, Outperform, €25 PT) CEO, Frans Muller, on strike recovery actions
Tariffs continue to be a tax on U.S. consumers and no sector, company, or consumer is likely to be untouched. Indeed, with List 4 of tariffs being brought into play this past week and the market’s sharply negative reaction, we wanted to take a look at the potential impact it would have directly on consumers and companies’ sales. Tariffs are effectively a tax on U.S. consumers/companies and could result in lower spending although some sectors will be more impacted than others according to our research. Based on our prior research around consumers’ marginal propensity to spend (here) coupled with a sensitivity analysis around average tariff rates and the amount of which are borne by the consumer, it appears housing, transportation, food away from home and entertainment (electronics) could face the most significant pressure.
NGVC’s comps were below our expectations, however, the company demonstrated its ability to lever expenses even in a tough operating environment. With that said, the path to EBITDA growth remains uncertain. Our research suggests that the pressure on NGVC’s business is likely to increase over time, given the overlap of NGVC’s store base with Whole Foods, and the continued expansion of delivery through Prime Now (currently available in 89 metro areas, up from 66 earlier this year, and from 24 about a year back). As we have said before, we have significant respect for the management team’s efforts however, the company, in our opinion, faces meaningful competitive pressures. As such, we remain Underperform rated on the equity.
SFM has a long way to go in order to turn itself around amid the current challenging competitive landscape, as both new store productivity and comp sales came in below expectations. Particularly worrisome to us is the lack of ability to drive sales at older stores, with a flat comp sales guide for the year significantly below the 2-3% comps needed to leverage costs and expenses. Despite the pressures faced by the business, management is fully cognizant of the challenges ahead and new CEO, Jack Sinclair, appears to have a firm grasp of the company’s uniqueness as well as the potential to differentiate its offering from the competition. We remain Peer Perform on the equity.
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