Iceland - Kantar numbers contrast with Iceland's performance
All,
Please find our unchanged analysis here.
We published our updated analysis last week, so this is a short note following the release of Kantar’s 12-week data and updated market share. Away from the catching headlines of higher food inflation, less frequent shopping visits by the UK consumer and a return to eating out, the 2yr data for UK retailers is roughly flat. This is marginally below the data visible from Iceland, which confirms marginal market share gains for Iceland over its peers.
UK Retail
- UK food inflation has arrived with Kantar showing price inflation has hit 5.2% in March. This is the highest since April 2012 and is prompting consumers to move to own-label products. The headline number of supermarket sales down 6.3%over the last 12 weeks is catching but the reality is that they are marginally up, 0.7%, compared to March 2020, which was just as Covid restrictions were in place.
- Although the discounters have gained market share, it is not visible from the data if consumers have started to change shopping habits in favour of discounters since the beginning of the year.
Impact on Iceland -
- This decline is more than what we expect for Iceland, but we caution against changing the model yet. Iceland has pledged to freeze the price of their £1 Iceland value frozen food lines through to the end of 2022. This is in contrast to the wider market where 'round pound' price points, such as £1, £2 etc, are being ditched to combat rising prices, accounting for 15.9% of overall products, down from 18.2% last year. Iceland is likely to gain market share due to maintaining its round pound pricing strategy which supports our view that top-line sales will hold up at Iceland.
- The second reason we are not changing our top-line assumptions is for the first four weeks of the 12 weeks referred to in the Kantar numbers, Iceland had already shared that their sales had increased by 12.3% on a 2yr basis, which doesn’t compare to the 0.7% Kantar references. Although we are comparing 4 weeks and 12 week periods, the difference doesn’t make any sense.
That’s Topline, what about Gross Profit?
- The crux of the investment decision. We fully expect Gross Profit margins to decline on food inflation pressures. But we have taken some comfort from discussions with management at Iceland, that the cost base concerning wages will reduce, helping absorb some of the margin pressures.
- However, we do envisage gross profit margin decline overall, but given the expected higher sales number, EBITDA will still be c. £50m. Our expectation is marginally less than Company’s guidance in early February.
- Iceland is fully hedged for energy consumption until March 22, Iceland’s year-end, but as of February, they had no hedges beyond then. We have factored in a further hit to Gross Profit margins for FY23, reducing EBITDA further.
However, in March 23, Iceland’s EBITDA reduces to £113m, down from LTM of £142m but due to the cash generative nature of the business, Iceland’s leverage only increases marginally from 4.9x to 5.6x.
Positioning:
- We bought 5% of Iceland 2025 at 92%, at a yield of 7.7%, as part of our rotation of risk in late February. Even at the very conservative £105m EBITDA (our model expects trough LTM EBITDA of £118m), Iceland achieves positive cash flow after interest and CAPEX. The business has excellent cash generation, and with a flexible CAPEX requirement, Iceland will trade through any downturn in EBITDA.
- The Company are not due to report their FY22 numbers (to March 22) until June. We remain conscious of the market’s perception of cost inflation and will be focusing on the trajectory of Gross Profit margin, as defined by Sarria (excluding wages, energy and leases), and Iceland's ability to compensate for the expected increase in wage and energy costs.
Happy to discuss,
Tomás
E: tmannion@sarria.co.uk
T: +44 20 3744 7009
www.sarria.co.uk