Hedgeye's Daniel Biolsi on state of the Consumer Staples sector + $COST $ACI $KVUE $HSY $IFF

Episode Summary

Executive Summary: Andrew Walker and Daniel Biolsi discussed how consumer staples can generate alpha through secular compounders, portfolio ballast, and event-driven setups. They debated Costco’s valuation, highlighted BJ’s as a cheaper but less certain share gainer, argued Albertsons offers merger/arbitrage upside with limited downside, explained why Kenvue’s spin-off could unlock value, reaffirmed Hershey as the top long, and said International Flavors looked weaker after a poor quarter.

Main Topics: Consumer staples as a source of alpha (Priority: 5/5): Biolsi argued that staples are often misjudged as boring, but can compound strongly via high-return businesses with mid-to-high single-digit growth and defensive characteristics during recessions or selloffs. Costco and valuation discipline (Priority: 5/5): Walker challenged the stock’s rich multiple, while Biolsi said Costco remains a top performer due to share gains, likely fee increases, and its status as a durable food-retail winner, though he suggested better entry points may exist elsewhere. BJ’s versus Costco and discount retail share gains (Priority: 4/5): The discussion centered on BJ’s as a lower-multiple membership club with potential from new-store openings, grocery focus, and a possible credit-card catalyst, but with less certainty than Costco and prior concerns about gasoline-driven overearning. Albertsons-Kroger merger arbitrage and standalone upside (Priority: 5/5): Biolsi emphasized Albertsons’ value as a merger arb with negative sentiment already priced in, optionality from divestitures or a breakup fee, and limited downside if the deal fails because of cash flow and potential alternative deals. Kenvue spin-off and consumer healthcare as a growth sub-sector (Priority: 4/5): He viewed Kenvue’s separation from J&J as unusually well-structured, with technical pressure likely temporary and a longer-term thesis built on standalone incentives, pricing, innovation, and sector re-rating potential. Hershey as the top long idea (Priority: 5/5): Biolsi defended Hershey against concerns about Mr. Beast, private label, and GLP-1 drugs, arguing the company has low private-label penetration, strong brands, acquisition discipline, and international growth potential. International Flavors after a weak earnings report (Priority: 3/5): He said IFF’s bad quarter matched his bearish macro concerns, especially around customers cutting inventory, weaker innovation, inflation, and input cost pressure, though he was no longer actively short going into the report.

Key Arguments: Staples can outperform through compounding, not just high growth, if businesses have durable margins, strong ROIC, and share gains. Costco’s valuation is expensive, but membership-fee increases and ongoing share gains may still support returns. BJ’s may work as a cheaper club-store play, especially if new-store economics and credit-card economics continue to improve. Albertsons offers spread/arbitrage upside, and if the merger fails, the business still has cash flow, a breakup fee, and potential strategic alternatives. Kenvue is better positioned as a standalone company than inside J&J, and the spin should attract the right shareholder base. Hershey is favored because private-label penetration is low, management is disciplined on acquisitions, and hype around celebrity brands is overstated. GLP-1 drugs are a real risk to snack consumption, but adoption, side effects, and insurance coverage likely limit the near-term impact. IFF faces broad macro headwinds from inventory reductions, input inflation, and weak innovation demand across its customer base.

Data Points: Podcast timing: Mid-August 2023 - Conversation referenced current market conditions and pending corporate events Costco valuation: 35-40x next-12-month earnings - Walker cited this multiple as the source of valuation concern Costco earnings yield: ~2.5% - Implied from the high earnings multiple versus rates 10-year Treasury yield: 4% - Used as a comparison to Costco’s earnings yield BJ’s prior thesis driver: Higher gasoline spreads in 2022 - Biolsi said this had helped overearn and was part of why the short/buy thesis changed Albertsons deal price: $27.25 per share - Value shareholders would receive if the Kroger merger closes, before possible adjustments Albertsons current stock price: $22 per share - Approximate trading level during the discussion Albertsons standalone valuation: ~4.5x EBITDA / ~9x unlevered FCF - Walker’s rough valuation framework for downside analysis Albertsons breakup fee: $600 million (~$1/share) - Potential payout if the merger breaks Albertsons-Kroger merger original announcement: Early 2022 - Walker referenced deal timing in framing the arbitrage Kroger valuation: ~10.5x EBITDA - Used to compare Kroger to Albertsons Albertsons valuation relative to Kroger: About two-thirds of Kroger’s multiple - Walker noted Albertsons looked cheaper despite the merger overhang Kenvue IPO price: $22 per share - Referenced as the starting point for the spin/offering Kenvue recent trading range: About $23 after peaking near $26 - Described as having come under technical pressure after the spin setup J&J/Kenvue election discount: ~7.5% - Biolsi said J&J structured the spin to encourage the right ownership base Hershey private-label penetration: Very low / among the lowest in food and beverage - A core reason Biolsi liked the stock GLP-1 appetite reduction: ~25% to a little over 50% - Estimated effect range Biolsi referenced when discussing weight-loss drugs GLP-1 monthly cost: ~$1,000/month - Biolsi used this to argue broad adoption is limited without insurance IFF recent stock reaction: One of the worst quarters / record down move - Walker described the earnings reaction as extremely negative IFF valuation: Low 60s stock price, ~13-14x 2024 EPS - Walker’s rough valuation estimate after the selloff

Pivotal Quotes: "I think staples is not volatile enough, not exciting enough, and then the staples are just sort of boring." — Daniel Biolsi: He explained the common misconception about consumer staples investing "I think it is one of the top performing stocks in my coverage unit." — Daniel Biolsi: On Costco’s strength despite concerns over valuation "I think that's one of the toughest things to do, right? Go short to long." — Daniel Biolsi: Discussing BJ’s, its prior short case, and the difficulty of changing stance

Implications: Listeners should focus on durable business quality, catalysts, and valuation discipline in staples rather than treating the sector as uniformly dull. The biggest actionable ideas were Hershey, Albertsons, and Kenvue, while Costco looked excellent but expensive.