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By Callum Turcan

According to some reports, US beer and alcohol sales are surging during the ongoing coronavirus (‘COVID-19’) pandemic. As of early Wednesday April 1, Johns Hopkins University reported there are now over 850,000 confirmed cases of COVID-19 around the world and that includes over 42,000 fatalities. We are still months away from human trials commencing on a potential vaccine, and it likely won’t be until 2021 at the very earliest that a vaccine could enter commercial production. As we wait out this pandemic, we hope everyone and their loved ones stay safe.

Booze Sales Surge

The global market research firm Nielsen reported that US alcohol sales jumped 55% year-over-year in the week that ended March 21 with beer sales up 42%, wine sales up 66%, spirit sales up 75%, and additionally, that online alcohol sales surged 243% due to the impact of stay-at-home orders. Other recent data from Nielsen indicates that this trend is only just beginning to pick up steam as the pandemic starts to impact consumer behavior all across the US. While such high growth rates are unlikely to last indefinitely, one of the biggest considerations of the pandemic is how will it change consumer behavior and purchasing patterns over the coming years (with an eye towards structural changes, i.e. greater booze consumption).

Due to changing consumer habits the US beer market has long been on a downward trend (particularly as it relates total volumes sold/consumed), so the sudden surge in demand is welcome news to many big brands. Anheuser Busch Inbev NV (BUD) makes the Bud Light, Budweiser, and Michelob branded beers. Shares of BUD have gotten crushed due to the market rout and fears over a coming global recession, a situation exasperated by its large net debt load (a product of past acquisitions). Should the firm find a way to keep its breweries open (reportedly, there’s anecdotal evidence Anheuser Busch is doing all it can to maintain supply, but we caution that such a strategy needs to be balanced with the safety of its workers and others involved), Anheuser Busch would likely be a major beneficiary of surging beer sales given its brands are a ubiquitous part of every grocer, convenience store, and supermarket.

With that in mind, Anheuser Busch exited 2019 with a pro forma (for expected divestment proceeds related to the sale of its Australian assets) net debt to EBITDA ratio of 4.0x on a trailing twelve month basis. That’s quite high, and we prefer firms with more manageable debt loads. Strong beer demand aside, should anything negative happen to its ability to generate cash flows or tap capital markets for refinancing and other purposes, Anheuser Busch would be placed in a tough spot. Our Dividend Cushion ratio of -1.4 (negative 1.4) highlights the structural weakness in Anheuser Busch’s dividend payout coverage, and we rate the firm’s Dividend Safety as “POOR” largely due to its hefty net debt load.

Dollar General

One firm that we do like and should be a major beneficiary of this trend is Dollar General Corporation (DG), and we include shares of DG in our Best Ideas Newsletter portfolio. For starters, Dollar General’s business model is based on catering to towns/cities with populations of 20,000 or less, regions where e-commerce offerings aren’t nearly as scalable or profitable as compared to major metropolitan areas. By targeting and growing in regions that Amazon Inc (AMZN) would find it hard if not downright impossible to compete in, Dollar General is preventing itself from becoming another casualty of the rise of e-commerce while still being able to capitalize on US consumer spending levels which were very strong over the past few years.

Due to the levels of panic buying we are currently witnessing, consumer spending on consumer staples goods and booze has apparently surged in recent weeks in the US, while spending on discretionary goods has dropped off. Kroger Company (KR) put out a press release on April 1 that stated (emphasis added):

Kroger leadership is closely monitoring the impact of the pandemic on food retail across global markets. From early observations, Kroger is seeing trends similar to other markets affected by the pandemic. The Kroger family of companies started to see a significant shift in customer behavior during the last few days of February as shoppers started stocking up. Sales sharply accelerated in March with identical retail supermarket sales without fuel up approximately 30 percent. This was driven by dramatically heightened demand in the middle of the month as customers were stockpiling, which then tapered, but remained higher than normal in the final week, as customers adjusted to the new dining, work and travel restrictions. The demand has been broad based across grocery and fresh departments. It is too early to speculate what will emerge as the "new normal" in food consumption at home or what the impact on sales will be in future periods.

Dollar General has a large selection of beer brands available in store, according to its website. The retailer also has a modest selection of wines in store as well. Please note the company has been expanding its produce, frozen food, and other in store food offerings in recent quarters (that includes expanding the number of stores that sell such products), enabling it to better meet the needs of its customers. While e-commerce booze sales surged along with alcohol sales in general (most alcohol sales are conducted in physical stores), given that Dollar General operates in regions where e-commerce offerings are likely to be less prevalent, that dynamic is unlikely to stealing away market share from the retailer.

On March 23, Dollar General announced it would hire up to 50,000 additional employees by the end of April to help the firm meet surging demand in the face of the pandemic. That was followed up by an announcement on March 24 that Dollar General would be making an additional $35 million investment in its employees via bonuses, particularly front-line employees (those working in its stores, distribution centers, and logistical operations) who are working during the pandemic. We appreciate the sacrifices front-line employees are making to ensure consumer staples and other goods can keep flowing to US households during the pandemic. 

The retailer operates more than 16,300 stores in 45 states, opening its first store in Wyoming in early March 2020 and the firm plans to also expand into Washington State this year; however, those plans are dependent on when stay-at-home orders are lifted. Dollar General notes that approximately 75% of the US population is within five miles of a Dollar General store. To cater to the needs of seniors, effective March 17, the first hour of store operations would be dedicated to a senior shopping time to keep those consumers safe during these harrowing times. Additionally, Dollar General is now closing its stores an hour early than normal to enable staff to keep shelves stocked, clean, and to support their mental wellbeing.

At the top end of our fair value estimate range, our estimated fair value for shares of DG stands at $172, indicating there’s room for shares of Dollar General to march higher from current levels. As of this writing, shares of Dollar General yield ~0.9%, adding incremental upside to its capital appreciation potential.

Concluding Thoughts

We continue to like Dollar General in our Best Ideas Newsletter portfolio and view the firm as well-positioned to ride out the storm and emerge on the other side as a stronger enterprise. Back on March 17, we published a piece on our website, ‘Dollar General Holding Up Relatively Well in the Face of COVID-19’, that we encourage our members to take a look if they haven’t done so already (link here).

Alcoholic Beverage Industry – BUD SAM BF.B STZ DEO TAP

Dollar Store and Department Store Industries – KSS M JWN BIG DG DLTR PSMT

Specialty Retailers Industry – AAN BBBY BBY GME HD LOW LL ODP SHW TSCO WSM

Food Retailing Industry – CASY COST CVS KR SYY TGT WBA WMT

Related: AMZN, HEINY, BREW

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Callum Turcan does not own shares in any of the securities mentioned above. Cracker Barrel Old Country Store Inc (CBRL) is included in Valuentum’s simulated Dividend Growth Newsletter portfolio. Dollar General Corporation (DG) is included in Valuentum’s simulated Best Ideas Newsletter portfolio. Some of the other companies written about in this article may be included in Valuentum's simulated newsletter portfolios. Contact Valuentum for more information about its editorial policies.