Iceland: Updated model - adding to our position

All,

Please find our stress tested model and analysis here.  

We are increasing our position from ~1.5% of NAV to 5% of NAV.

Demand:

- According to the ONS, on average food & non-alcoholic drink expenditure (grocery shops) was £61.90 for year ending March 2019, with outside catering totalling £40.70 per week. As the population self-isolates, there is an increase in “home” dining as canteens and eating out options are reduced/not available and school lunches etc are no longer available. Beyond hoarding and stock-piling, this combined effect, channels natural demand to the supermarkets. 

- Taking last years figures of £101.60 spent on combined groceries and outside catering - if only 30% of what was outside catering is now directed towards the supermarkets, demand for supermarket food increases by 20%+.

Supply:
- Clearly supermarkets are remaining open in this environment and continue to trade to the extent they can source the scarce and therefore potentially expensive supply. We have heard from Boparan today that they are prioritising key clients and presumably most food producers will be doing that. With its comparatively small size Iceland is at risk of not making it into such an illustrious club with every supplier. Moreover, prices will be hard to keep under control if the supermarket (trader) can’t set sales prices freely. - But in fact we are not hearing that either suppliers or supermarkets are taking such a short term view and suspect that prices are held relatively stable throughout the supply chain. - Supermarket are struggling to source sufficient supply and are therefore focussing on key items in most ranges. However, all major supermarkets are facing the same problem and given scarcity, we expect demand to reallocate to those goods that are available (think socialism). So we don’t believe that shortages in the supply chain of certain items will cause a drop in sales as demand is primarily for sheer sustenance. Costs:- The need for faster re-stocking is adding to logistics costs, as are increased salaries / bonuses to front-line staff in these times. We have modelled those into our numbers.

Base Case:
- We assume a possibly modest 2.5% growth for the quarter (Jan/Feb 1% increases, and 5% increase in March). We have also increased the staff costs for the month by 4% (Jan/Feb was likely only up 1%, 10% increase in the month of March). Coupled with the impact on sales, is the reduction or removal of vouchers/multi-buy discounts, which will in turn improve Gross Profit margins for the last month in the quarter.  - All in, we are forecasting leverage to remain stable and through year-end and therefore sustainable from there. Upside comes from the large number of maturing stores that were rolled out in recent quarters.


Tomas