J.正式版. 摩根-美股食品零售行业：牛市和熊市的喂食时间到了-2021.5.26-83正式版

NorthAmericaEquityResearch

26May2021

FeedingTimefortheBullsandtheBears

DeepDiveIntothe+/-CasesonEachSectorandCompanyUnderCoverage(Grocers,Producers,Ag/Protein)

AndreaTeixeiraandIareco-hostingourSpringAheadCallSeriesat11amETtoday,inwhichwewilldiscussoursectoroutlooks(toparticipate,youmustregisterinadvancehere).Inconjunctionwiththisevent,myteam–TomPalmer,AnooriNaughton,andI–thoughtitwouldbeusefultorefreshourin-depthBull/Beardiscussionsoneachcompanyandsectorwecover.WestartwithFoodRetail,thenmoveintoFoodProducers,andfinishwithAg/Protein.

Eachsectioninthis78notecontainsthebullcase,thebearcase,andouropinion(ex-Ag/Proteinasasector).Tojumptoaparticularsection,clickanyofthefollowinglinkswithinthenote:

FoodProducers&RetailersKenGoldmanAC

(1-212)622-0359

ken.goldman@

BloombergJPMAGOLDMAN<GO>

ThomasPalmer,CFAAC

(1-212)622-5582

thomas.palmer@

BloombergJPMAPALMER<GO>

AnooriNaughton

(1-212)622-9558anoori.k.naughton@J.P.MorganSecuritiesLLC

FoodRetailers

FoodProducers

Ag/Protein

SectorDiscussion

SectorDiscussion

Darling(DAR-OW)*

Albertsons(ACI-OW)

BellRing(BRBR-OW)

Mission(AVO-N)*

Kroger(KR-N)

BeyondMeat(BYND-UW)

SandersonFarms(SAFM-OW)

Sprouts(SFM-N)

CampbellSoup(CPB-N)

Tyson(TSN-N)

Conagra(CAG-OW)

Freshpet(FRPT-OW)

GeneralMills(GIS-N)

HainCelestial(HAIN-OW)

Hershey(HSY-N)

Hormel(HRL-UW)*

Hostess(TWNK-OW)

Kellogg(K-N)

KraftHeinz(KHC-N)

LambWeston(LW-OW)*

McCormick(MKC-UW)

Mondelēz(MDLZ-OW)

Smucker(SJM-N)

*LeadJPManalystisTomPalmer

TreeHouse(THS-N)

Seepage79foranalystcertificationandimportantdisclosures.

J.P.Morgandoesandseekstodobusinesswithcompaniescoveredinitsresearchreports.Asaresult,investorsshouldbeawarethatthefirmmayhaveaconflictofinterestthatcouldaffecttheobjectivityofthisreport.Investorsshouldconsiderthisreportasonlyasinglefactorinmakingtheirinvestmentdecision.

KenGoldman

NorthAmericaEquityResearch

(1-212)622-0359

26May2021

ken.goldman@

FoodRetailers

SectorDiscussion

TheBullCase

Food-at-hometrendsremainstrongdespiteaway-from-home’sresurgence.Onatwo-yearbasis,takeawaytrendsforUSfood-at-homehavebeennotablyconsistentrecently,eventhoughmoreAmericanshavebeengoingbacktorestaurantsthanacoupleofmonthsago:

Figure1:Two-yeartakeawaytrendsforUSfood-at-homehavebarelybudgedrecently

36%39%

Food-at-Home$TakeawayY/Y-4Weeks

0%3%

31%

34%

14%

13%

11%

10%

10%

1%

2%2%2%

3%3%

3%

2%

3%

3%

0%

17%17%

8%

-1%

-4%-3%-4%

20%

14%

13%13%

11%

13%

13%13%13%13%

5%

2%2%

3%

3%

3%

3%

3%3%

5%

3%

3%

15%

18%

18%

19%

15%

14%

13%

13%

12%

11%

11%

10%

11%

12%

12%

10%

9%

12%

12%

9%

11%

17%

14%

12%

11%

11%

11%

10%10%

11%

5%

4%

2%

2%

3%

3%

3%

3%

3%

2%

4%

3%

0%

1%

5%

3%3%

3%3%

4%

Total

-13%

15%

-6%

-13%

16%-

-

05/04/19

05/18/19

06/01/19

06/15/19

06/29/19

07/13/19

07/27/19

08/10/19

08/24/19

09/07/19

09/21/19

10/05/19

10/19/19

11/02/19

11/16/19

11/30/19

12/14/19

12/28/19

01/11/20

01/25/20

02/08/20

02/22/20

03/07/20

03/21/20

04/04/20

04/18/20

05/02/20

05/16/20

05/30/20

06/13/20

06/27/20

07/11/20

07/25/20

08/08/20

08/22/20

09/05/20

09/19/20

10/03/20

10/17/20

10/31/20

11/14/20

11/28/20

12/12/20

12/26/20

01/09/21

01/23/21

02/06/21

02/20/21

03/06/21

03/20/21

04/03/21

04/17/21

05/01/21

$TakeawayY/Y

2-YearCAGR

Source:NielsenIQ.

Wehaveheardanumberoftheoriesastowhyat-homeconsumptionhasremainedsticky,includingthatAmericansaresimplyeatingmorethanever(alwaysapossibility).Butscannerdatawouldsuggestthatat-homevolumesindeedaredown.Itispricingthathasacceleratedandsavedthedayfornow.Inourview,thisisencouragingbecauseifanything(aswediscussimmediatelybelow),pricingwillcontinuetoaccelerateastheyearprogresses.

Figure2:Asrestaurantsre-open,foodretailunitshaveslipped,butpricinghasoffsetsomeofthedeceleration

PricevsUnits-2YrCAGR

14%

12%

10%

8%

6%

4%

2%

0%

-2%

-4%

08/24/19

09/21/19

10/19/19

11/16/19

12/14/19

01/11/20

02/08/20

03/07/20

04/04/20

05/02/20

05/30/20

06/27/20

07/25/20

08/22/20

09/19/20

10/17/20

11/14/20

12/12/20

01/09/21

02/06/21

03/06/21

04/03/21

05/01/21

Price(2-YrCAGR)

Volume(2-YrCAGR)

Source:NielsenIQ.

2

KenGoldman

(1-212)622-0359

ken.goldman@

NorthAmericaEquityResearch

26May2021

Theconsistencyofat-home$takeawayinthefaceofhigheraway-from-homenumbersisakeyreasonwebelievesell-siderevenueestimatesneedtogoupforAlbertsonsandKroger.Weareaboveconsensusonbothofthesecompanies’saleslinesforeachofthenextthreequarters:

Figure3:WeareaboveconsensusonthesaleslineforeachofACI’snextfourquarters,aswellasthreeofKR’snextfour

-NextThree

vsBBG

1.6%

0.4%

1.2%

0.7%

0.7%

RevenueGrowth

Quarters(JPM

0.0%

0.1%

-1.0%

Est

ACI

KR

+1Q+2Q+3Q+4Q

Source:BloombergFinanceL.P.

InflationshouldincreasinglyhelpcompsasCY21progresses.Basedoncurrentspotandfuturepricesforkeycommodities,ourproprietarymodelforecastsbetween~5%and~7%Food-at-HomePPIineverymonthbetweenJuneandDecemberof2021,foratotalof4.5%thisyear(itwillbelow-singledigitsin1H).Toputthisinperspective,thelasttimePPIwas>5%fortwostraightmonthswasin2014(alsothelasttimeitwasabove4%forayear):

Figure4:OurPPImodelcallsfor4.5%in2021,similartothelevelin2014(notethatourPPImodelhasbeen92%accurateinforecastingPPIoverthelastdecade)

2.6%2.4%

4.5%4.3%

4.5%

2.2%2.1%

1.3%

2.0%

0.1%0.5%

2.0%2.2%

1.3%1.2%

-1.3%-1.1%

-2.4%-2.0%

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021E

ReportedPPI

JPMPPIModel

Source:BloombergFinanceL.P.andJ.P.Morganestimates.

Somemightworrythatthislevelofinflationistoohightopasson.ButinFY14,Kroger’sIDsalesex-fuelwere+5.2%Y/Y,thehighestinanyyearbetweenFY07andFY19,on+2.7%ticket.AndAlbertsons’were+4.7%,thesecondhighestbetweenFY12andFY19.SoclearlygrocerycompscanreactwelltoinflationintheMSDlevel.

3

KenGoldman

(1-212)622-0359

ken.goldman@

NorthAmericaEquityResearch

26May2021

Figure5:ThelasttimePPIwasintheMSDrange(asweexpectittobeovertherestofthisyear),KRandACIhadtwoexcellentcompyears(andgrossmarginswereflattish–notpictured)

KRandACIIDsalesex-fuelversusPPI–FinishedConsumerFoods

6%

5%

4%

Y/Y

3%

2%

1%

0%

-1%

-2%

-3%

2012 2013 2014 2015 2016 2017 2018 2019

PPI KR ACI

Source:BloombergFinanceL.P.andcompanyreports.Note:ThefiscalyearsofKRandACIendinJanuaryofthefollowingcalendaryear.Toaccountforthis,weusePPIfromFebruarythroughJanuaryintheabovechart.

WealsonotethatinFY14,KR’sFIFOgrossmarginex-fuelwasflatY-Y,aswasACI’stotalgrossmargin,perhapsindicatingthatMSDinflationdidnotimpaircoremargins.Lastly,consumersweregenerallynotinasgoodaplacein2014astheyarenow,sotheymaybelessresistanttodaytopricehikes.

BearsmightnotethatkeyrivalWalmartwasonitsheelsbackthen,whichhelpedboostsalesofrivalssuchasKRandACI,butthiswastruenotonlyin2014butalsoinmanyyearsaroundthattime.Inourview,therefore,Walmart’sformerstrugglesdonotexplainwhyKR’sandACI’scompsacceleratedin2014.WalmartiscoveredatJ.P.MorganbyChrisHorvers.

Lastly,wewouldemphasizethathistorically,highinflationhasbeenpositiveforgrocerystocks:

Overthelast20+yearspre-COVID,therehasbeena50%correlation

betweenKR’soutperformanceversustheSPXandKR’sIDsalesex-fuel:

4

KenGoldman

(1-212)622-0359

ken.goldman@

NorthAmericaEquityResearch

26May2021

Figure6:Since1999(andexcluding2020),therehasbeena50%correlationbetweenKR’soutperformanceversustheSPXandKR’sIDsalesex-fuel

60%

6%

40%

5%

Fuel

KRvsSPX

20%

4%

0%

3%

IDSalesEx-

2%

-20%

1%

-40%

0%

KR

-60%

Correlation=50%

-1%

-80%

-2%

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

KRvsSPX

KRIDSalesEx-Fuel

Source:BloombergFinanceL.P.andcompanyreports.

Inotherwords,thoughnottheonlydriver,IDsalesareveryimportantdeterminantsofKroger’srelativestockperformance.Andofcourse,IDsaleshavebeenpositivelycorrelatedovertimewithinflation:

Thelastfourtimesthatinflationspikedby4.5%orhigherY/Y,theKRsharesoutperformedtheSPX:

Figure7:Thelastfourtimesthatinflationspikedby4.5%orhigherY/Y,theKRsharesoutperformedtheSPX

60%

8%

40%

6%

vsSPX

20%

4%

PPI

0%

2%

-20%

KR

-40%

0%

-60%

-2%

-80%

-4%

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

KRvsSPX

PPI

Source:BloombergFinanceL.P.

Putanotherway,evenperiodsofveryhighinflationhavebeengoodforKR’sstockinrecentyears.

5

KenGoldman

(1-212)622-0359

ken.goldman@

NorthAmericaEquityResearch

26May2021

Deflationisamuchscarierwordthaninflation.Overthelastdecade(theonlyperiodwehaveinformationfor),thecorrelationbetweenKR’srelativeperformanceasastockanditsFIFOgrossmarginex-fuelishigh(61%).Butthisislargelybecausemassivedeflationin2015and2016(thelongestperiodinsixdecades)greatlyimpairedmargins.Duringdeflationarytimes,notonlydogrocersoftenpricedownirrationallybuttheyalsoexperiencefixedcostdeleveraging.

It’simportanttorememberthatgrossmarginsarenotthebe-all-end-all;infact,Kroger’sSG&Aex-fuelasapercentageofsales–abigdriverofprofitability–hasbeennegativelycorrelatedwithinflationovertime.Thatis,inflationhasbeenverygoodforKR’sabilitytoleveragefixedcosts:

Figure8:InflationhasbeenverygoodforKR’sabilitytoleveragefixedcosts,asobservedbythenegativecorrelationbetweenPPIandKR’sSG&Aex-fuelasapercentageofsales

Y

0.6%

Correlation=-47%

7%

6%

Y-

0.4%

5%

Ex-Fuel

Y-Y

3%

0.2%

4%

Mgn

PPI

0.0%

2%

SG&A

-0.2%

1%

0%

KR

-0.4%

-1%

-2%

-0.6%

-3%

2011

2012

2013

2014

2015

2016

2017

2018

2019

KRSG&A%SalesEx-FuelY-Y

PPI

Source:CompanyreportsandBloombergFinanceL.P.

Industryleaderslikelywillcontinuebehavingrationally.Someinvestorsareconcernedthatastonnagefallsontoughcomps,certainretailers(especiallyWalmart,coveredbyChrisHorvers)willtrytoregainsharebyinvestingmoreheavilyinprice.Butthereisnoindicationthatishappening.Yes,asWalmartrecentlyindicated,itspricegapshavewidenedoverthelast12months.But(a)morerecentlythesegapshavenarrowed,(b)Walmartsaiditishappywhereitsgapsaretodayandis“proud”ofthem,and(c)Walmartisalreadygainingbackagreatdealofshareandsaiditis“pleasedwiththesharegainsthathappenedinmeatandproduceinbakery”.Whywouldanyretailersuddenlyreducepriceswhenitdoesnothaveto?Todosowouldbetogivemoneyaway,inourview.

6

KenGoldman

NorthAmericaEquityResearch

(1-212)622-0359

26May2021

ken.goldman@

Figure9:OursurveyindicatesnarrowingpricegapsversusWalmartwithinfoodretailoverthelastthreemonths

0.3%

inBasketPricePriorQuarter

-0.7%

-1.0%

Chg.vs.

-1.1%

WMT

TGT

ACI

KR

-1.8%

SFM

May-21

Average=-0.9%

Source:J.P.Morgan.Note:SequentialchangeinJPM-measuredbasketfromFebruarytoMay2021

Figure10:NielsendataalsopointtoWalmartraisingpricesmorethansupermarketshaveinrecentweeks

Store:Y/Y(L12W)

10%

8%

6%

TotalPrice/Unit

4%

2%

0%

-2%

07/29/17

09/30/17

12/02/17

02/03/18

04/07/18

06/09/18

08/11/18

10/13/18

12/15/18

02/16/19

04/20/19

06/22/19

08/24/19

10/26/19

12/28/19

02/29/20

05/02/20

07/04/20

09/05/20

11/07/20

01/09/21

03/13/21

Mass

Food(Supermarkets)

Source:NielsenIQ.

Figure11:MostofWalmart’sCOVID-drivensharelossesarereversing

Diff.inTakeawayofFoodProducts:Foodvs.MassChannel(1WkY/Y)

<MassShareFoodShare---->

30%

20%

10%

0%

-10%

-20%

-30%

5/11/195/25/19

6/8/196/22/197/6/197/20/19

8/3/198/17/198/31/199/14/199/28/19

10/12/1910/26/1911/9/1911/23/19

12/7/1912/21/191/4/201/18/202/1/20

2/15/202/29/203/14/203/28/20

4/11/204/25/205/9/205/23/20

6/6/206/20/207/4/207/18/208/1/20

8/15/208/29/209/12/209/26/20

10/10/2010/24/2011/7/2011/21/2012/5/20

12/19/201/2/211/16/211/30/21

2/13/212/27/213/13/213/27/214/10/21

4/24/215/8/21

Source:NielsenIQ.

TheBearCase

Two-yeartoplinegrowthratesforgrocersisalreadydecelerating,andlikelywillcontinuetodosooverthenextfivequarters.TheCOVID-19situationintheUS,thoughfarfromover,israpidlyimproving.TheUSgovernmenthasremovedmanymaskmandates,restaurantsinsomeoftheprevioushotspots(e.g.NewYork)nolongerhavemanyrestrictions,andAmericanswillbetravelinginmuchgreaternumbersthissummer.Itishardtoimaginethatinthisenvironment,trendsforfood-at-homewillstayashealthyastheyarenow.Indeed,two-yearcompsforbothACIandKRhavedeceleratedsequentiallyeachofthelastthreequarters,atrendwedonotexpecttobottomuntil1Q22:

7

KenGoldman

(1-212)622-0359

ken.goldman@

NorthAmericaEquityResearch

26May2021

Figure12:EventhoughourestimatesareabovetheStreet’s,weseetwo-yearcompsforbothKRandACIdeceleratingsequentiallyeachofthenextfivequarters

-YrCAGR)

15%

5%

10%

(2

Ex-Fuel

0%

Sales

-5%

-10%

1Q19

2Q19

3Q19

4Q19

1Q20

2Q20

3Q20

4Q20

1Q21E

2Q21E

3Q21E

4Q21E

1Q22E

2Q22E

ID

KR ACI

Source:J.P.Morganestimates.

Itisnotalwayseasyforgrocers’stockstooutperformwhentheircompsareheadinglower,aswesawwithKRhalfadecadeago.Granted,theissuebackthenwasoneofcorrosivedeflation,butforinvestorswhoinstinctivelyshyawayfromslowinggrowthstories,thereasonsoftendonotmatter.

Supermarkets’coreproblem–competitionfromWMT,COST,andAMZN

–remainsintact.Asweseeit,thefundamentalproblemsupermarketsfacehasnotchanged:Theystillcompeteagainsttwobehemoths–WMTandAMZN–thatcanuseinexpensivefoodasaquasi-lossleadertoattractconsumersintotheirstores.Andofcourse,grocersincreasinglyarecompetingagainstdiscounterssuchasCOSTandBJ(bothcoveredbyChrisHorvers)anddollarstores(MattBoss).AMZNiscoveredbyDougAnmuth.

Aswediscussbelow,KRisstartingtomakesomeboldmovesregardingecommerce/delivery.Buteveninafewyears,whenitsOcado-drivenshedsareprevalent,willKRbeabletosuccessfullycompeteondeliveryagainstWalmartandAmazon?Theanswerisunclear.

Grossmarginsmaybeatriskifinflationrunstoohot.Asoutlinedabove,weareaheadoftheStreetonKR’sandACI’ssaleseachofthenextthreequarters.Butwearenotasoptimisticaboutgrossmargins.Infact,wearebelowconsensusonthegrossmarginforeachofACI’snextfourquarters,aswellasthreeofKR’snextfour:

8

KenGoldman

(1-212)622-0359

ken.goldman@

NorthAmericaEquityResearch

26May2021

Figure13:WearebelowconsensusonthegrossmarginforeachofACI’snextfourquarters,aswellasthreeofKR’snextfour

NextThree

0.1%

vsBBG

0.0%-0.1%

GrossMargin-

Quarters(JPM

-0.1%

-0.3%

-0.4%

-0.5%

Est

-0.9%

ACI

KR

+1Q

+2Q

+3Q

+4Q

Source:BloombergFinanceL.P.

Itisunclearfromourperspectivewhatisdrivingthesegaps.Perhapswearefactoringmoredeleveragingthanourpeersare,ormaybeourpeersareassumingthatinflationispassedthroughtoprotectmarginsratherthanpennyprofit.Eitherway,wethinkinvestorsshouldprepareforgrossmargindisappointmentsahead,whichinflationwillonlyexacerbate.Retailersdonotpriceformargin–theypricetomaintainprofit–andsome(ACI)arestartingtotalkaboutacceleratingefficiencyprogramsratherthanpassingoneverydollarofinflationthatcomesthrough.Alsokeepinmindthatfuelisgoingtobeaheadwindthisyear;alreadyACIhassaidfuelwillbea$50MMheadwindto1Q.

OurTake

Itisdifficulttobenegativethissectorwhenweseeupsidetorevenuesahead.Historically,foodretailershavebeenbettercorrelatedwithcompsthanothermetrics.Thenagain,it’salsotoughtobepositivewhenweseecompsdeceleratingaheadandpotentialgrossmarginmisses.Wesupposethatintheend,fundamentalfactorswillnotmatterasmuchashowinvestorsarebroadlypositionedoverall.IfPMscontinuetopivotbacktowardgrowth-orientedstocks,thenit’snotimpossibletoseethevalue-orientedfoodretailspaceunderperforming.

Overthelongrun,wewouldbedisinclinedtobepositivethissector.TheS&PFoodRetailIndexhasunderperformedtheS&P500ineachofthelastthreeyearsandsixofthelastseven(including2021YTD)forareason.Moreoftenthannot,investorswespeakwithonthisspacearenotfondofthelong-termfundamentaloutlookforsupermarketsbecauseofthecompetitivethreats.Thestoryisdifferent,ofcourse,formassmerchandisers,clubstores,anddiscounters.

9

KenGoldman

(1-212)622-0359

ken.goldman@

NorthAmericaEquityResearch

26May2021

Figure14:TheS&PFoodRetailIndexhasunderperformedtheS&P500ineachofthelastthreeyearsandsixofthelastseven(including2021YTD)

40%

30%

20%

Y/Y

10%

0%

Index

-10%

-20%

-30%

-40%

-50%

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

YTD

S&PFoodRetail

SPX

Difference(Retail-SPX)

2021

Source:BloombergFinanceL.P.

Albertsons(ACI–Overweight)

TheBullCase

Near-termsame-storesalesestimatesprobablyneedtorise.For1Q21(ending6/19/21),wemodel-11.8%IDsalesex-fuel,54basispointsabovetheConsensusMetrixforecast.OurcutofNielsendata(seeherefordetails)suggeststhatbothofourestimatesaretoolow.HistoricallyourmodelhasbeenveryreliableinforecastingACI’scomps(92%pre-COVID,98%includingCOVIDperiods).Weseethepotentialfor2Q21compstocomeinaheadofconsensus,too.

Highcashbalance.Attheendof4Q20,thecompanyhad$1.7MMofcashandequivalentsonthebalancesheet,arelativelylargeamountgiventhecompany’ssize:

Figure15:ACIhastheequivalentof10%ofitsenterprisevalueincashonthebalancesheet,oneofthelargestsuchpercentagesinouruniverse

Value

5%16.

Cashas%Enterprise

0%10.

5%8.

6%6.

0%6.

7%5.

5%5.

3%5.

9%4.7%4.

3%4.

0%3.9%2.

6%2.

2%2.

9%1.

3%1.3%1.

2%1.

0%1.9%0.8%0.

6%0.

0.3%

BYNDACI

SFM

TWNK

AVO

HRL

GIS

LW

FRPTCPB

KR

KHCHSY

SJM

TSN

MDLZ

SAFMK

HAIN

THSMKCBRBR

DAR

CAG

Source:BloombergFinanceL.P.Note:Forgrocers,EVincludesoperatingleasesandpensions.

Wearecurioushowthismoneywillbedeployed.Managementreiterateditslonger-termstrategylastmonth;however,netdebttoEBITDA(pre-leasesand

10

KenGoldman

(1-212)622-0359

ken.goldman@

NorthAmericaEquityResearch

26May2021

pensions,whichishowACIlooksatleverage)isnowat1.5xandthecompany’sdebtisrelativelycheap.SharerepocouldacceleratebuttheACIfloatisalreadylow.SomeinvestorshavespeculatedthatperhapsACIwillbuybacksomeofCerberus’stockdirectly,ratherthanCerberuscreatinganoverhangbyofferingsharestothewidermarket.Thismakessensetouslogically,thoughwedonotknowifeitherACIorCerberusisinterestedingoingdownthisroad.

Attractivevaluation,especiallywhenexcludingmulti-employerpensionplans.WestillseesignificantupsidetoourDecember2021targetprice,plusadividend.OnatraditionalEV/EBITDAbasis,ACIistradingat4.3xconsensusFY22EBITDAversusclosecompKRat6.3x.Whenweaddoperatingleasesandpensions(including50%ofmulti-employerplans),thegapnarrowsbutremainssubstantial:4.8xEV/EBITDARversus6.7x.

Figure16:Whetherpensionsandleasesareincludedorexcluded,ACIissignificantlycheaperthanKR

FY22E

6.3x

6.7x

EV/EBITDA(R)onConsensus

4.3x

4.8x

EV/EBITDA

EV/EBITDAR(incl.opleases&

pensions)

ACI

KR

Source:BloombergFinanceL.P.Note:Includes50%ofMEPPdeficitsinEV/EBITDARcalculations.

Aside:Wearenolongerconvincedthatallofagrocer’sMEPPsshouldbetreatedasdebtforvaluationpurposes.Infact,inlinewithour3/11/21note(“ABigStepforMEPP”)wenowthinkit’sreasonabletoexcludesomemultiemployerplanexposurefromvaluations.Inourvaluationswenowonlyfactor50%,undertheassumptionthegovernmentwillbackstoptherest,thoughthisisofcoursejustanestimate.

TheBearCase

Headwindsfromshrinkandfixedcostdeleveragecouldleadtocoregrossmarginmisses.Asdiscussedabove(Fig.13)weareconcernedthattheStreethasnotbeensufficientlyconservativewhenmodelingACI’sgrossmargins.It’snotjusttheimpactfromgrocery(whereweexpectACItogivebackaround2/3oflastyear’smargingain)butalsofuel(wheremanagementhasguidedtoa$50MMEBITheadwindthisquarteralone).It’sdifficulttoforecastanygrocer’sgrossmarginrightnow,consideringallthemovingpiecesandunknowns,butwethinkit’sbettertobesafethansorry,especiallygivencostinflation.

ACI’secommerceplatformisstartingtofallbehind.AmazonisAmazon,Walmarthasbuiltaworld-classecommplatformwiththehelpoftheoldJ,andKrogerisabouttoembarkonalargecapexjourneytobuildOcado-runsheds.AsforAlbertsons,whenitcomestocompany-owned,end-to-endecomm

fulfillment,managementcontinuestorelylargelyonthirdparties(e.g.Instacart)

11

KenGoldman

(1-212)622-0359

ken.goldman@

NorthAmericaEquityResearch

26May2021

andwillonlyhaveninemicro-fulfillmentcentersbytheendofthisfiscalyear.Intheend,ACImaybemakingtherightdecisionbyleaningmoreheavilyonthirdparties,whichpermittwo-hourdelivery.ButitalsoispossiblethatACIisunder-investinginsomecorecapabilitiesitwillneeddowntheroad.

Lowfloat.Oneofthebearishargumentswehearfrominvestorsisthatthestockisnotparticularlyliquid,andthisistrue.First,only23%ofACI’sstockfloated,thelowestinourcoverageuniverse.Andsecond(onarelatednote),intermsofdollarsofstocktradedperday,peerKRis10xhigherthanACI.

Figure17:Only23%ofACI’sstockisfloated,thelowestinourcoverageuniverse

%SharesFloated

7%99.

3%99.

3%99.

0%99.

6%98.

6%98.

6%98.

6%98.

2%98.

9%97.

2%96.

2%96.

2%94.

3%92.

3%92.

3%86.

4%83.

9%74.

4%70.

5%66.

7%53.

4%51.

7%28.

22.6%

GIS

LW

SFM

MDLZ

DAR

AVO

SFM

TSN

THS

CAG

TWNK

FRPT

SJM

KR

MKC

BYND

HAIN

K

HSY

CPB

KHC

HRL

BRBR

ACI

Source:BloombergFinanceL.P.

Figure18:Overthelast90days,only$34MMofACI’sstocktradedinanaveragedayversus$327MMforKR

Days)

465

401

Avg$StockTraded(Last90

327

272

255

191

160

154

136

126

115

114

107

98

81

65

60

34

292828

19

6

4

MDLZ

BYNDKR

GIS

KHC

K

HSY

TSN

SJM

CAG

DAR

MKC

CPB

HRL

LW

SFM

FRPT

ACI

THSHAINSAFM

TWNK

BRBR

AVO

Source:BloombergFinanceL.P.Note:$MM.

OurTake

WeremainconstructiveontheACIshares.Wedonotthinkthatfundamentally,ACIandKRaresufficientlydifferenttowarrantthiswideofavaluationgap.Webelievesalesgrowthwillremainhealthyforatleastacouplemorequarters,especiallyconsideringthatguidanceisconservative(itassumesonly1-2%inflation).Wethinkthevaluationissufficientlyappealing(2.0xbelowKRonconsensusFY22EEBITDA)thattherisk/rewardonACIisstrongevenheldasanakedlong(i.e.notpairedwithKR).WhilewewouldliketoseeACIgetabitmoreaggressiveonbuildingoutmicro-fulfillmentcenters,wecannot

12

KenGoldman

(1-212)622-0359

ken.goldman@

NorthAmericaEquityResearch

26May2021

faultthecompanyforplowingmoremoneybackintowhere~90%ofalltransactionsarestilldone:thestoresthemselves.

Kroger(KR–Neutral)

TheBullCase

StreetestimatesforIDsalesmayneedtorise.TheconsensusestimateforKR’sIDsalesex-fuelis-6.7%in1Q21E,or+11.0%onatwoyearbasis.