7/9/2024 Weekly Update - The McElwee Report
U.S. Economy's Next 10 Years, Organic Food Industry, IPOs, And More
This Week’s Edition
What Direction Is the U.S. Economy Heading in the Next 10 Years? Reviewing the Congressional Budget Office’s 10-Year Outlook.
Which Companies May IPO in the Near Future? Noteworthy brand names with potential IPOs include Skims, Vuori, Liquid Death, and SHEIN.
Why is Organic Food So Expensive? A high-level look into the U.S. organic food industry, including Sprouts Farmers Market, Inc. (SFM) +68.3% year-to-date stock performance in 2024.
Other Interesting Data Findings: All-time high median sales price for homes; NYC rental market; U.S. investor sentiment and spread between bulls and bears.
Next Week’s Edition will be sent at 10:00am ET on Tuesday, July 16th, and will include the socioeconomic impacts of AI, IonQ + quantum computing, the fitness club industry, tripled levered ETFs, and more.
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What Direction Is the U.S. Economy Heading in the Next 10 Years?
Record-high credit card debt; low unemployment; staggering government spending; and three-plus years of inflation.
Currently, the U.S. economy certainly has a mixed-bag of symptoms with no definitive diagnosis. Given the government’s overwhelming response to the Covid-19 era, even now, we are proceeding through “unchartered” territory and no amount of expert forecasting will really provide us with a clear picture of the future.
Since the CDC reported the first laboratory-confirmed case of Covid-19 in January 2020, the U.S.’s total debt held by the public, has increased an astonishing $10.4 trillion — or 60% — to $27.6 billion in only four years and five months.
The Congressional Budget Office, which provides nonpartisan analysis for Congress, releases a 10-Year Economic Forecast on an annual basis with a mid-year update. The latest update, released on June 18th, offered a sobering view of the U.S. economy.
Fiscal Unsustainability. As Fiscal Data states, comparing the U.S.’s debt held by the public to its GDP shows the burden of debt relative to the country’s total economic output and therefore its ability to repay it. This percentage grows from 99.0% in 2024 to 122.4% in 2034. Fundamentally, this trajectory is not fiscally sustainable.
Aging Society. By 2034, mandatory spending, which includes social security, Medicare, and Medicaid, will be 15.3% of GDP compared to the 1974-2023 historical average of 11.0%. This occurs as discretionary spending which includes defense and nondefense (e.g., transportation), drops from an 8.0% average to 5.5% — which increases risks for long-term economic growth and national security.
Rising Net Interest Costs. The amount of interest the federal government pays on its debt will grow from $892 billion in 2024 to $1.7 trillion in 2034 — a staggering increase of 92%. Because of this higher cost of financing, less money will be available for productive spending.
This forecast is simply a baseline so it’s very likely the U.S.’s debt will grow with more economic interventions. With more debt at higher interest rates, the U.S. government will need to either reduce spending or increase taxes, which may trigger a recession. This action is a politically unpopular move — especially during a presidential election year.
Which Companies May IPO in the Near Future?
To raise capital for growth, a company offers an initial public offering (IPO), which allows institutional investors, such as Fidelity and Vanguard, and retail investors, through smaller brokerage accounts, to have ownership in a company.
An IPO also allows these companies’ employees and investors to exit their investments.
A company’s debut in the market is rather abrupt. Market conditions like volatility and overall market performance, investor sentiment, and geopolitical risk may influence the day a company ultimately makes its debut on the stock market.
However, by monitoring indicators such as S-1 filings — a form required by the SEC for an IPO — or following media releases of investor roadshows, investors and brand enthusiasts can anticipate when companies will be available for public ownership sometime in the near future.
With that in mind, here is a list of potential IPOs in the near future:
Skims — A direct-to-consumer products company selling underwear, loungewear, and shapewear.
Valued at $4 billion in July 2023, the company, founded in 2019 by Kim Kardashian and Jens Grede, had $750 million in 2023 sales.
Today, Skims has 6 million followers on Instagram and it was reported that 11 million people have joined wait-lists to buy the brand’s products.
The brand is promoted by celebrities including Kate Moss, and marketed through strategic collaborations with social media influencers.
Vuori — An athleisure brand with innovative fabrics and California-inspired aesthetics.
The company continues to gain steam as its valuation grew to $4 billion and expectations to open 100 stores by 2026.
The company is backed by SoftBank’s Vision Fund 2 — the same fund that has investments in the fintech Chime and the quantum computing company IonQ, which will be covered in next week’s edition.
Vuori seeks to gain more market share in the athleisure realm as its mature competitor Lululemon (LULU) has reached $37 billion in market value. Other competitors include Outdoor Voices, Alo Yoga, and Rhone.
Liquid Death — A beverage company launched by a former creative director for Netflix campaigns with a focus on marketing bottled water under a rebellious brand identity.
Since launching in 2019, Liquid Death is now worth $1.4 billion and, from 2022 to 2023, its sales more than doubled from $110 million to $263 million, respectively.
Its success is fueled by its edge design and marketing slogans, including “murder your thirst,” “death to plastic,” and “recycle or die.”
Today, Liquid Death is sold in more than 113,000 retail outlets in the U.S. and U.K.
SHEIN — A fast-fashion online retailer that specializes with quick turnaround for emerging fashion trends with a supply network of 6,000 factories in China.
SHEIN was founded in China in 2008 and now has its headquarters in Singapore. The company is valued at $64 billion and its sales are estimated to hit $50 billion this year. Sales remarkably grew from $4 billion in 2019 to $32 billion in 2023.
The company confidentially filed for an IPO last November. SHEIN also confidentially filed for an IPO in London last month.
SHEIN has faced numerous scandals from reports of 12 hour shifts, 6-7 days a week, to its use of the de minimis tax exception, which allows SHEIN to ship packages to the U.S. duty-free (if the package is valued less than $800) and without higher-level U.S. customs oversight.
Because of its practices, the company may face significant issues in completing an IPO in the U.S.
Why is Organic Food So Expensive?
Despite years of inflation, “organic” continues to be an endearing label for American consumers.
The Organic Trade Association reported in May that U.S. sales of certified organic products in 2023 reached $69.7 billion, an increase of 3.4% from 2022. Of this total, $63.8 billion (92%) resulted from organic food sales (organic non-food products totaled $5.9 billion).
40% of products tracked by the association’s survey had a higher quantity sold to consumers, indicating many consumers are continuing to buy organic despite price increases.
Overall, from 2019 to 2023, U.S. food prices have increased 25%, a rate higher than increases in housing, medical, and apparel. Although a growth index of organic food is not readily available, organic prices are generally more expensive than conventional. For example, organic chicken breasts are now more than 2.5x times the costs of a regular pack.
Intuitively, it is more expensive to operate an organic foods business. Certification and higher operational costs — driven by more expensive materials and labor from production to distribution — and the inability to achieve the massive economies of scale of a conventional food business drive up costs for producers.
However, “price premiums,”, the higher prices consumers are willing to pay for the perceived benefits of organic, allow for organic producers to recover higher costs — and even achieve higher profitability than conventional production.
These price premiums allude to an emerging American consumer behavior — “organic” is now becoming a necessity with growing demand.
Findings from the Organic Trade Association survey:
Organic produce makes up more than 15% of total U.S. fruit and vegetable sales and top sellers included avocados, berries, apples, carrots, and packaged salads.
Total organic baby food and formula sales hit $1.5 billion, an annual increase of almost 11%.
Organic wine sales increased modestly at 2.5% ($377 million), while organic liquor and cocktails jumped over 13% ($59 million).
Changing consumer demographics and revelations brought by research, like the Environmental Working Group’s (EWG) annually released list of 12 fruits and vegetables (“EWG’s Dirty Dozen™”) that are most likely to be contaminated with pesticides, have heightened consumer awareness for the organic label.
And it’s for good reason. EWG stated in its most recent report that 75% of non-organic produce “is coated with pesticides.” For the dirty dozen, 95% of samples contained pesticides, notably fungicides that may be disruptive to human hormone systems.
Organic became a federally regulated industry in 2002. Through its National Organic Program, United States’ Department of Agriculture (USDA) creates and enforces organic food standards. Below are the specific requirements for different types of products as defined by the USDA
Produce & Grains — Natural fertilizers; eco-friendly pest control; protects soil and water.
Meat, Dairy & Eggs — Roam freely outdoors; protects animal welfare; no growth hormones or antibiotics.
Packaged Goods — No GMOs; traced from farm to store; no artificial colors, flavors, or preservatives.
Since the inception of “organic” in the U.S., total certified organic U.S. acreage increased to 4.9 million in 2021, up from 1.8 million in 2000.
American’s growing necessity for organic foods is translating well in the stock market. Sprouts Farmers Market, Inc. (SFM), a specialty retailer of “fresh, natural and organic food in the United States” based in Phoenix, AZ, has had steady revenue and earnings growth as its stock price has climbed +68.3% so far this year. A competitive advantage for Sprout is that 27% of total sales were from organic products.
The company’s strategy includes focusing on attribute-based marketing, which includes organic, paleo, keto, plant based, non-GMO, gluten free, vegan, dairy-free, taw, and grass-fed products. Today, more than 70% of products sold are attribute driven, and its brands sales as a percentage of total company sales grew from 14% to 20%.
Sprouts is also opening new stores under its smaller box size concept which emphasizes a “fresh-focused, famers market heritage” that are less expensive to build with more favorable economics. In its May 2024 investor presentation, its new “four-wall box target economics” include, on average, $13 million in its first year of annual sales and sales growth of 20-25% in the following four years.
The company intends to grow at a 10% unit growth rate with a “potential for 300+ new stores in expansion markets” including Pennsylvania, New Jersey, Virginia, Florida, Texas, and California.
A key to success for Sprouts’ overall strategy — and the organic foods industry as a whole — may be its own customer demographic. The average household income of a Sprouts shopper is $121 thousand, and, as the company states, is “less susceptible to economic downturns.”
But, another interesting statistic from a November 2023 report showed that lower income households are increasing their organic purchases as 4% more adults who make less than $50K and 7% more adults who make $50K-$100K are buying organic food now than they were two years ago — even during harsh inflationary conditions.
Resources
The Organic Trade Association provides resources on organic food. Click here.
The USDA”s Organic Integrity Database has a comprehensive list of certified organic farms and businesses. Click here.
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3 Other Interesting Data Findings
On June 30th, the median-sale sales price for U.S. homes hit an all-time high of $397,954, a year-over-year increase of 4.9% and the largest increase since March. There is a 17.5% increase from last year in active listings and a 4.6% decline in pending sales — the largest decline in four months.
One-bedroom rental rates continue to climb in NYC with a 2.4% increase from last month to $4,300. This harsh rental environment is exacerbated by an historic vacancy rate low of 1.4% and post-pandemic job growth. Zumper states NYC’s employment base is now 2.5% above the level seen in February 2020. Overall, rents are continuing to modestly increase across the U.S., which will continue to put pressure on inflation.
The spread between bulls and bears, as shown by AAII Sentiment Survey, remains in bull territory, which indicates that individual investors think the stock market will be in a positive direction in the next six months. 34.1% of survey respondents think that that guidance on future revenues and earnings is most important as companies report second-quarter 2024 earnings.