✈️ Southwest's (shocking) profit

Friday, April 23, 2021 by Robinhood Snacks | Disclosures
_Airlines' new target customer [izusek/E+ via GettyImages]_

Airlines' new target customer [izusek/E+ via GettyImages]

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Hey Snackers,

An Italian hospital employee allegedly skipped work for 15 years. And you thought a four-day work week was luxurious.

Stocks dropped yesterday on reports that President Biden is considering nearly doubling capital gains taxes on the wealthy to fund government spending (think: 40% taxes on investment gains).

Cockpit
1. Out of left airfield: Southwest's first quarterly profit in the pandemic era

All in the same cockpit... Major US airlines just dropped earnings, and we're sensing a trend: American, Delta, and United all reported $1B+ losses. But their outlooks were brighter on rebounding travel demand (thanks: vax rollout, spring break). While these airlines saw their 5th-straight quarterly losses, Southwest came in out of left airfield:

  • Southwest revealed a $116M profit yesterday, its first quarterly profit since the pandemic began. $1.2B in government aid definitely helped, but there's more to the story...

LUV being different... LUV is Southwest's ticker symbol — and its mood in 2021. The favorable wind boosting Southwest: its domestic and leisure focus. Business travel has been hammered by the WFH life, and some execs say it may never recover. International travel has been hammered as Covid lockdowns hit Europe, and many international borders remain closed.

  • That's good for Southwest, which has a largely domestic network of US flights and more leisure-focused flyers (it doesn't offer business or first-class). By June, it expects to fly 96% of its pre-pandemic schedule.
  • That's bad for Delta, United, and American, who depend on business travel and international routes. United needs business and international traffic to recover to 65% of pre-pandemic levels to even turn a profit — they're both down 80% right now.
THE TAKEAWAY

Sometimes, less is more... Sure, Southwest doesn’t have the reach of bigger international airlines. Most of its eggs are in the US economy class basket, so it suffers when that basket suffers. But its risk exposure to other factors, like international travel, is limited. Now, other airlines are leaning more into domestic leisure travel, too: Delta, American, and United recently added dozens of domestic routes. Alaska added four new routes to tourist-friendly Montana destination (think: Yellowstone). We can expect these airlines to focus more on your Miami girls trip, less on your Dallas conference.

Presso

My Nesquik brings all the boys to the yard... Nestlé is the world's largest packaged food company, known for treats like Kit Kats, Hot Pockets, and basically anything that begins with "Nes." A year ago, Nestle reported its strongest quarterly sales growth since 2015, thanks to pandemic snacking and pet-mania (it owns Purina). Last quarter was even sweeter:

  • Nestlé had its strongest quarterly sales growth in almost 10 years. Sales jumped 8%, largely thanks to your morning coffee routine...

Does the Nespresso store do samples?... Nestlé's killer growth was fueled by the at-home coffee boom. Instead of hitting Starbs for a pre-office latte, you were firing up Nespresso pods or Nescafé in your jammies. Nespresso sales jumped a whopping 17% last quarter, as Nestlé won new customers in North America.

  • Treat Yo (Home) Self: People invested in espresso machines and name-brand brews to replicate barista coffee from their kitchens. Nestlé's Vertuo = business class Keurig.
  • Not just Nes: In 2018, Nestlé paid Starbucks $7B+ for the right to sell its packaged coffee beans/grounds. Those thrived last quarter, too.
THE TAKEAWAY

One habit is worth a lifetime... of customers. You buy Nestle's Kit Kats and Toll House cookie dough occasionally. But your daily coffee isn't just a product for Nestlé — it's the habit that keeps on giving. You splurge $200 for a Nespresso machine, then spend $30/month to refill pods. That's why Nestlé is making investments to own the coffee habit: it's expanding production centers in Switzerland, and intro'ing new flavors and products (think: touchless machines). TBD if the momentum will continue as coffee shops and offices reopen.

What else we’re Snackin’
  • Green: At his climate summit yesterday, President Biden unveiled a new target that calls for cutting US emissions ~50% from 2005 levels by 2030.
  • Snap: Snap stock jumped 5% after the little ghost reported that sales grew 66% last quarter, beating Wall Street's expectations.
  • Percey: Direct-to-consumer glasses company Warby Parker reportedly plans to go public in the US as soon as this year.
  • Added: After announcing privacy changes that are poised to hurt Google and Facebook, Apple is making moves to expand its own ad business.
  • Musky: Tesla reports earnings on Monday, but the Auto Shanghai expo shows it faces real competition from Chinese EV makers.
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Authors of this Snacks own shares of: Delta and Snap

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