HG & HY Weekly Register: The Deals Are Alive

Research evidence excerpt

HG & HY Weekly Register: The Deals Are Alive

ll that it would use tariff refunds to

“invest in price.” One of our key concerns for 2H26 has been a price war that hurts grocery

and CPGs. This will keep pressure on margins for both constituents. PEP this week said

it expects to offset costs (transportation/packaging) with efficiency improvements and

tariff refunds. We remain Underweight both KR and ACI on lackluster industry trends

and potential shareholder friendly activity.

• Advanced Auto Parts (AAP) ratings were moved to Stable outlook from both

Moody’s & S&P (Ba3/BB) on improved operating performance post its turnaround

efforts (store closures, hub build out). Moody’s expects AAP to be FCF + and that the

company will show continued growth in in topline and profitability. S&P expects the

company to maintain adj lev <5x over the next 12mo. Our equity team called out the

potential for a return to IG following its management meetings a few weeks back

(Horvers note here). While we think it is too early to call AAP an IG candidate (it is 3-

notches below and needs to show sustained improvement), Moody’s could upgrade if it

continues to show improved profitability and cash flow, as well as lease-adj debt/

EBITDA sustained <4.5x (and EBITA/interest >3.5x). It could be downgraded if these

metrics creep to 4.4x or greater and 2.5x or below, respectively. We calculate lease adj

leverage at 5x today.

• Costco (COST) reported solid June comps +7.6% (digital +21.5%), but traffic

decelerated (now +3.2% from the high-3% for US and total in May) on gas-driven traffic

moderating. Lower gas prices drove less need for consumers to seek out COST’s deals.

Ex gas and FX comps were +7% with strength in pharmacy, gas, hearing aids, gold and

electronics (memory pricing).