In case you missed it on Monday, we launched our new Wolfe Weekly CPG Price Tracker where we have begun tracking Walmart pricing on a select basket of roughly 125 fast turning, high penetration products. We analyze these prices as an overall basket, as sub-baskets broken out into Food, Household Products and Chemicals (HPC) and Pet, and as company specific baskets for individual manufacturers with the goal of providing insight on CPG price movements and trends. This new report differs from our monthly Notes from the Road in which we visit multiple key markets throughout the U.S., track comparable basket prices across multiple retailers in each market to gauge competition, and showcase notable pictures and themes we’re seeing from on the ground. Be on the lookout for the next edition of our Wolfe Weekly CPG Price Tracker tomorrow afternoon. We hope you enjoy the new product! Feel free to reach out with any questions or feedback you may have.
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We visited our nearby Whole Foods in CT to see the new round of price cuts implemented today. The cuts were focused on fresh produce, fresh meats, and select items throughout the store (primarily 365 branded items). Pictured below, the price of Organic Strawberries dropped to $2.99 from $3.99 (25% decrease), Navel Oranges to $0.99 from $1.79 (45% decrease), and Lemons to $0.69 from $0.89 (22% decrease). Other organic fruits and vegetables were also labeled with new lower prices throughout the produce section. Deli items such as Virginia Ham or Black Pepper Turkey Breast had a $2.00/lb price reduction (16% decrease), and items such as ground beef also had new lower prices. It wasn’t just fresh produce and meats though, as the price cuts also seem to have occurred on select 365 branded items, such as chicken broth, almond butter, apple sauce, bottled water, canned tomatoes, pasta, and tomato sauce. As we published in our Consumer Survey note last week (A Recipe For Disaster), we view Amazon as a relentless threat in the consumables industry, especially as it begins to generate more profitability that may enable the company to further cut price and broaden the appeal of Whole Foods.
We are launching a new product today, our proprietary Wolfe Weekly CPG Price Tracker. In this report, each week we will analyze prices on a basket of approximately 125 items at Walmart on a national pricing level. Our basket is broken out by category including Food, Household Products and Chemicals (HPC), and Pet. Further, we break out by individual manufacturer. We hope you enjoy the new product and, as always, feel free to reach out with any questions or feedback you may have!
In case you missed it Friday afternoon (03/29/19), please see our Chaos! Video Brief and Presentation where we break down several of our recent reports…it’s been a busy week! Topics include technology and its new role in food as the line between food-away-from-home versus food-at-home begins to blur, as well as shifting demographic and consumer trends, highlighted by new data from our proprietary 2019 Consumer Survey that could shake up the Food Retail and Food Producer industries. Further, we dive into the relentlessness of Amazon (AMZN, Outperform, $2,200 PT), analyze recent pricing trends and the current standing of Kroger’s conundrum discussed in Friday’s Notes From the Road (KR, Underperform, $22 PT). Additionally, we walk through our downgrades of Kraft (KHC, Underperform, $27 PT) and Sprouts (SFM, Peer Perform).
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.
Best Buy, as the only dedicated national electronics retailer, is clearly thriving in an omnichannel world, with higher EBIT dollars, even as its online sales are growing rapidly. Indeed, the skilled management team has leveraged BBY’s footprint and worked hard with its vendors, resulting in stable margins and significant reward to shareholders. Our research, however, suggests that the best may be yet to come as new technologies, specifically 5G, could propel a multi-year sales lift in a number of BBY’s core categories. We would further postulate that the team’s decisions to move into connected healthcare/fitness as well as invest in its services offerings such as Total Tech Support could prove very prescient in a 5G world. With historically strong returns and the current low valuation, we believe investors will be well-rewarded for owning BBY’s shares, and we are upgrading the equity to Outperform from Peer Perform, with a $78 PT.
The calendar may have turned, but the challenges impacting the Food Retail and Food Producers industries remain unchanged. The groups are marred by slow sales growth, higher costs, falling returns and subpar balance sheets. We do not believe 2019 will see any deviation from these difficulties as they appear largely systemic and, as such, we continue to advise investors to underweight Food Retail and Food Producers. In our opinion, while a sharp economic slowdown would clearly hurt if it were to materialize, the Hardlines Retail industry still appears poised to see robust sales growth fueled by a strong consumer, stable margins, and higher ROIC. These companies also have solid balance sheets and a penchant to return cash to shareholders. With valuations reasonable, we continue to suggest investors overweight Hardlines Retail. Finally, the Broadlines Retail industry is seeing sales grow rapidly, in part due to the strength of the economy, but with labor expenses increasing and with the need for omnichannel investments, EBIT growth and better ROIC remain elusive for some. While this causes us to advise market weighting the Broadlines Retail industry, we do believe there are opportunities for outperformance (AMZN, DG) and underperformance (BJ) within the group.
Best Buy’s 3Q19 results last week, while ahead of Consensus, missed our estimate for U.S. sales, and the mid-point of the U.S. 4Q comp outlook was slightly below our expectations as well. Indeed, if we have a concern it is around the slowdown being seen most visibly in the housing market, and the potential that it could start to depress sales in important areas of the store such as appliances and home theater systems. Add in the possible impact of tariffs and the recent swoon in the equity markets, and we believe that the risks around the equity have increased. With that said, the current economy remains very strong, core middle income households are experiencing good wage growth, and the future is far from written around tariffs and the equity markets. Balancing a solid holiday outlook and reasonable valuation against rising uncertainty for 2019, we remain Peer Perform rated on the equity.
Target reported 3Q18 comp sales of 5.1% (vs. Wolfe 5.8% and Consensus 5.5%) and Adj. EPS of $1.09 (vs. Wolfe $1.09 and Consensus $1.11). Sales were ahead of the company’s previous guidance for 4.8% but appear light of expectations. Guidance for 4Q18 comp sales is approximately 5%, in-line with our 5% estimate and ahead of Consensus 4.4%. Guidance for full year Adj. EPS of $5.30 to $5.50 is unchanged and implies 4Q18 Adj. EPS of $1.42 to $1.62, bracketing our $1.47 and Consensus at $1.52. The significant takeaway from the quarter is that gross margin declined approximately 90 bps, well in excess of what we were forecasting. While there are multiple contributing factors, it is clear to us that Target’s omni-channel initiatives are pressuring margin significantly. The challenge as we see it, and one of the major reasons we downgraded the equity to Peer Perform after last quarter, is that any sales slowdown from the current pace is likely to meaningfully pressure results. Call at 8:00am ET.
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