The Smucker’s team is waging a gallant fight to maintain growth both on the top and bottom-line. Indeed, the company has moved aggressively to gain exposure to faster growing categories like Pet, as well as launch new products/brands in its existing portfolio. The challenge, however, is the competitive climate remains elevated in most areas of its business, as much larger operators such as Nestle and General Mills invest behind competing brands in hopes of driving their growth algorithm. At the same time, retail giants like Walmart push to enhance private label offerings in Smucker’s core areas of peanut butter and jelly. Our research suggests that this environment likely will continue and, perhaps, even get worse. This, in our view, will pressure both top-line and bottom-line results and we are reiterating our Underperform rating.
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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.
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
Our Underperform rating on KHC was predicated on our view that the planned price increases would fall short of expectations, that the value of key brands would continue to deteriorate and face private label pressure, that consumer preferences would continue to drift away from Kraft’s offerings, and that the company’s high financial leverage and declining EBITDA would make it difficult to address these problems. With 1H19 sales and EBITDA missing expectations, additional brand impairments of $1.2bn primarily in international markets, the withdrawal of FY19 guidance for positive organic sales growth and EBITDA of $6.3-$6.5bn, and the lack of a defined plan to reinvigorate profitable growth, we view the challenges in the business as likely to persist and any efforts to correct as likely to be a multi-year process which results in lower margins than today. As such, we are reiterating our Underperform rating and lowering our target price to $24 (from our prior $27) based on our lower estimates.
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
THS reported 2Q19 earnings on Thursday 8/1 before the market open. On 8/1, THS also completed the previously announced sale of its Snacks division (for $90mm) and expects to close the sale of its ready-to-eat cereal business (for $110mm) pending an ongoing FTC review. Indeed, with the divestments nearly completed, the management team expects a better growth profile as well as higher margins for THS going forward. To us, THS should benefit from a better margin profile in the coming quarters, however volume growth for its remaining businesses remains challenging. While we expect to have greater clarity on the financial model for the pruned down business in the coming quarters, we are maintaining our 9.5x EV/EBITDA target multiple on our new FY20 EBITDA estimate of $522mm (was $552mm previously). Balance the strong consumer acceptance for private label food (THS remains the largest private label food manufacturer) with uncertain profitability growth over the next year, we are maintaining our Peer Perform rating.
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.
Topics this week…
Consumables Corner – 1) Another market and more examples of why the Golden Age of private label is upon us 2) Smucker’s 1850 still has little traction and 3) SFM, THS, and NGVC earnings previews
Target’s Tidings – Solid remodels, but execution in consumables remains an issue
Quotes of the Week – Proctor and Gamble (PG, Not Covered) CEO, David Taylor, on the competitive environment and product innovation
Our Total Walmart basket rose this week as our Pet and Food sub-baskets moved higher. Indeed, our Food basket moved up approximately 0.1% from the prior week largely driven by price increases on Hidden Valley Ranch Dressing (CLX), Betty Crocker Fudge Mix (GIS), and Mini Wheats (K). Turning to the Pet category, our basket was up approximately 1.3% from last week as the promotional activity we saw on Smucker’s Milk-Bones has since reversed back to normal levels. Our HPC basket remained flat to last week as the category has continued to hold relatively stable since the beginning of May. On a y/y basis, Walmart’s National Basket remains up (+0.9%), Food remains deflationary (-0.5%), and HPC and Pet baskets are inflationary (+1.8% and +4.7%, respectively).
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