JaguarConsumer Weekly Callouts – August 6 (BOOT, COCO, XLP)
Shares of Boot Barn (BOOT) would close higher on August 3rd by 13% after reporting its Q1 earnings the night before. The company reported Q1 EPS of $1.13 that was well above consensus of $0.84. Comparable store sales came in at -2.9% vs. consensus of -8% driven by a Retail comp of -1.8% and an e-commerce comp of -10.8%. Gross Margins came in at 37.0% vs. consensus of 35.9% driven by +90 bps of merchandise margin.
Looking a bit more closely at comps, from April to June, they improved sequentially from -6.9% to -3.3% to +1.0%, with sequential improvement in both Retail and eCom comp trends. Meanwhile, July comps did take a step back slightly to -0.5%.
Piper Sandler highlighted notable Exclusive Brand penetration, showing a remarkable +630 bps increase in sales mix Y/Y for Q1. As a result, BOOT increased its private brand penetration outlook for the year from +400 bps up to +500 bps Y/Y – reaching 39% of sales. The company now has 7.5M active members in its loyalty program, which was up +23% Y/Y. Within its loyalty member base, the company recently completed a survey and found (a) Customers are not shopping for fashion, but instead for everyday wear, (b) Only 4% of customers cited the show Yellowstone as a reason for buying BOOT products, and (3) 90% of customers are likely to shop again within the next 12 months.
This past week, Vita Coco (COCO) reported its Q2 numbers that beat on both EPS and Revenue. Looking past the headline numbers, the company announced that it is terminating its largest private label contract. While Piper Sandler estimates approximately $75M of lost sales in 2024, they see upside to COCO’s gross margins as it shifts to a more branded product mix. They estimate COCO’s EBITDA margins could have a ~100bps lift with the shift in product mix.
“Nearly all private label business will be gone; better margin profile helps multiple. COCO had ~$88M in private label sales last year, so if our ~$75M lost sales estimate is roughly correct, remaining private label sales (even with some growth) are likely less than 5% of sales, down from more than 20% in 2022. We prefer branded businesses, and the margin upside impacts how we think about our target multiple. We use a ‘score’ of EBITDA margins plus revenue growth rates (by adding the two together) to compare consumer growth companies. Trading multiples for these comps (relative to their ‘scores’) suggest a ~24x EV/EBITDA multiple is now appropriate for COCO.”
Similarly, Evercore ISI said they believe the company exiting the private label business is a sign of commercial momentum and strength, reflecting the robust potential of the brand. “In FY23, we continue to believe the outlook is achievable as COCO benefits from lower freight, a strong innovation pipeline, and distribution gains. Longer-term, consumer migration to health/wellness and the demographic engine of Hispanic and Asian-American population growth will continue to benefit COCO’s brands.”
Kraft Heinz (KHC) and Kellogg (K) both reported soft revenues in North America driven by volume pressure as consumers continue to push back against higher grocery prices. Kellogg cited increasing price elasticity as the primary driver of the (11%) volume decline it saw in North America. Similarly, Kraft saw an (8%) volume decline and cited wider price gaps to more promotional peers as a key driver of share loss. Although they are seeing these gaps starting to narrow, commodity prices are falling faster than expected, and Truist would not be surprised to see promotions accelerate further as vendors look to pass on lower costs to take share. They continue to believe that food disinflation may create 2H comp headwinds for grocery-levered names in their coverage.
“We expect stubbornly high dry grocery inflation to moderate more rapidly in 2H as vendors see elevated volume degradation – Kraft and Kellogg reported LSD % organic sales growth in North America driven by ~9%/14% price increases, mostly offset by ~(8%)/(11%) volume declines, respectively. We believe these pressures will persist as consumers continue to gravitate towards promotions and private brands in the tougher economic environment (Walmart’s private brand penetration was +110 bps in CY1Q23). Walmart has noted that historically 80% of share shifts towards private brands are never recovered, which we believe will make vendors more cautious on 2H pricing. As a result, we suspect dry grocery inflation (which to this point has remained elevated in the HSD range) will moderate more dramatically in 2H23.”
Similarly, we pointed out to clients a RBC Capital note related to the consumer staples category. After a strong spike in sales during the pandemic, volume growth in the cereal category has consistently been negative, driven by significant pricing. Despite the cereal category being considered “cheap eats,” it is pretty clear from the data that consumers are feeling the financial pinch and migrating to private label. “Regardless of the economic segmentation we look at (from the “Hardest Hit” to “Prospering Professionals” ), purchase frequency for private label cereal is up when looking at the past 52 weeks versus a year ago (June-ending quarter). All the major branded players are lagging (see Exhibit 1). In addition, consumers are migrating their overall spend of the cereal category to value-based channels like Aldi (price) and Costco (price per unit), where many companies have less visibility given its absence from several syndicated data services.”
