Broadly In-Line 2020 for JDE Peet's; Cautious 2021 EBIT Guidance Implies Downgrades

JDE Peet's reported 2020 results with organic growth down 0.2% (up 0.3% in our model), driven by weakness in out-of-home sales, which were down about 30%. This was offset by strong in-home top-line growth (8.2% and 9.8% in the first and second halves, respectively). Volume continued to be negative in the second half with price contributing a positive 1.8%. Despite negative volume growth, adjusted EBIT growth was higher at 6.2%, but this was driven primarily by a reduction in advertising and promotion expenses, which we do not perceive as sustainable. Management guided for organic sales growth of 3%-5% in fiscal 2021 but cut its adjusted EBIT growth target to the low single digits due to an expected normalization of the advertising and promotion budget from about 5% of sales in 2020 to more than 6% going forward. JDE Peet’s reduced its longer-term EBIT growth target to the midsingle digits from 5%-8% while keeping unchanged its 3%-5% organic sales growth aspiration. Given the new guidance, we expect to reduce our fair value estimate by a mid-single-digit percentage.