Global Equity: Shareholder Update

EPIC Global Equity Fund
April 2023

Shareholder Update

Following a dismal 2022, many forecasters warned investors to brace themselves for further pain. According to Bloomberg, at the beginning of 2023, forecasts were the most bearish since 1999, implying another negative year of returns.

However, for the first quarter ended March 2023, the Nasdaq returned 20.8%, which is one of its strongest quarterly returns ever, Food for thought!

After focussing on the technology and communications sector in the previous update, we are now shifting our attention to the consumer staples and discretionary sector.

We are pleased to observe that, overall, the consumer sector has shown a remarkable level of resilience, with the consumer appearing to have proven the doom-and-gloom predictions wrong yet again.

PepsiCo

PepsiCo’s performance was strong in the fourth quarter of 2022, beating expectations. Organic revenue increased 15%. The company attributed this success to consumer resilience and a shift towards familiar brands such as Cheetos and Doritos. PepsiCo's dominant 22% market share in global savoury snacks gives it pricing power despite inflationary pressures in key ingredients.

To navigate the inflationary headwinds, PepsiCo increased prices by 14% in North America and 20% in Europe in 2022, demonstrating pricing power and brand strength. This helped the company announce a 10% increase in its annual dividend, marking the 51st consecutive increase.

Overall, the company's strong financial performance, dominant market position, and pricing power suggest a positive outlook for PepsiCo. However, the inflationary pressures in key ingredients may continue to pose a challenge for the company in the future.

L’Oréal

L’Oréal enjoyed a strong fourth quarter with like-for-like sales growing by 8% and operating profit increasing by 21%. The company's performance beat market expectations despite weakness in China. L'Oréal continues to execute impressively and is winning market share across all divisions and global regions. Margin expansion was a significant contributor to the company's performance.

Shareholders have been rewarded with a 25% increase in the dividend, indicating the company's confidence in its financial position and future prospects. Management expressed confidence in the year ahead.

Starbucks

Starbucks reported fiscal 2023 first-quarter results in line with expectations. The US division achieved a stellar performance, with same store sales growing 10%. Volumes increased 1% despite 9% growth in average check out value. The company's performance in the US was offset by dismal results in China, which were worse than expected. Same store sales fell 29% during the quarter. According to management, the recovery is taking longer than anticipated.

LVMH Moet Hennessy Louis Vuitton

The company reported a record year in 2022. Group revenue and profit from ongoing operations grew 23%, all the more impressive considering the flat performance in China. Operating margins remained intact. Europe, the United States and Japan rose sharply, benefiting from strong demand from local markets and assisted by the recovery of international travel. The company continues to win market share across its brand portfolio. Management are confident in the year ahead with January starting strongly and  the revival in China expected to provide a strong tailwind. The dividend increased 20%.

Estee Lauder

Estee Lauder reported an 11% revenue drop in constant currency. Orders were reduced by retail partners in North America as well as in China as a result of Covid restrictions. Management highlighted that although the recent lifting of these restrictions is likely to be positive, a recovery in travel retail in Hainan and South Korea will take time.

Amazon

Amazon reported solid fourth quarter results. Revenue grew 12% in constant currency, ahead of management guidance. Third party seller activity was particularly strong. AWS growth slowed to 20% and management indicated that growth had decelerated further, albeit still in the mid-teens. Management expects growth in AWS to remain relatively subdued over the next few quarters, yet it believes 90% to 95% of enterprise workloads remain on-premises implying that we are still in the initial phase of this vast long-term opportunity in cloud computing. Amazon Advertising continues to take market share from the digital advertising market, with its 19% growth significantly outperforming Meta Platforms (Facebook) and Alphabet (Google).

Pool Corp

Pool Corp delivered a strong set of final 2022 figures; net sales increased 17% and operating income grew 23%.

Impressively, these results were achieved despite new pool construction in 2022 expected to be down 16% from prior year.

Since 2019, revenue growth has increased by 93%, comprised of 30-35% from price inflation, 17% from acquisitions, 9% from new pool construction, 7% from growth in the installed base of pools and 25-30% from market share and new product growth.

During 2022, the company returned 82% of its net income to shareholders in the form of share buybacks and dividends, which increased 25%. According to management, the company continues to lead its industry peers in return on invested capital. We believe that Pool is materially undervalued.

JD Sports issued a strong Christmas trading update. Revenues in its organic retail business strengthened in the second half with total revenue growth for the 22 weeks to 31 December 2022 of more than 10%, compared with growth of 5% for the first half as reported in the interim results. Profit before tax and exceptional items is now expected to be at the upper end of guidance. Profit before tax and exceptional items for the next full year (to 3 February 2024) is now expected to be over £1 billion. 

The company also hosted a capital market day in which it set out its growth strategy over the coming five years, including its financial and commercial targets. These include double digit revenue growth, double digit market share in key regions, double digit operating margin, capex of £500-600 million per annum with 50-60% of spend focused on store expansion in underpenetrated markets with 250 to 350 new JD stores per annum and cash generation from operating activities of £1 billion per annum.

Diageo

Diageo, the alcoholic beverage company, reported strong net sales growth of £9.4 billion, an 18.4% increase, with growth seen across all regions. The increase was due to strong organic net sales growth which benefited from robust pricing. The company's diversified footprint, market-leading portfolio, and strong brands enabled growth despite cost inflation. Diageo saw market share growth primarily in scotch, tequila, and beer categories, with premium-plus brands contributing 57% to net sales and driving 65% of organic net sales growth. The company also continued its optimisation of the portfolio through acquisitions and disposals, including an agreement to acquire Don Papa rum, a super-premium dark rum from the Philippines. Diageo invested in sustaining long-term growth with £0.4 billion of capex in supply capacity, sustainability, digital capabilities, and consumer experiences. Diageo increased the interim dividend by 5% to 30.83 pence per share and expects to return up to £5 billion of capital to shareholders by February 2023.

Other results

We will provide a further update on the results of other holdings within the EPIC Global Equity Fund shortly.

Malcolm Schembri
Fund Manager, EPIC Global Equity Fund