B&G Foods (NYSE:BGS) is having a tough time this year, as its stock is down 11%. The processed- and packaged-foods company's latest financial results were also mixed, with an increase in revenue led by food service. However, B&G posted weaker-than-expected earnings growth, which hurt investors' confidence and the share price.
Moreover, B&G operates in a competitive segment where there are bigger peers such as General Mills (NYSE:GIS) and TreeHouse Foods (NYSE:THS). So B&G will need to step up its game if it is to compete effectively in a tough environment. But B&G management believes that it will be able to deliver strong earnings growth in the future, and the company has been taking some concrete steps to achieve this target.
A brief look back
Last year, B&G made several acquisitions, including Pirate Brands, Rickland Orchards, New York Style, and TrueNorth. These transactions have expanded the company's presence in several food segments and led to strong year-over-year revenue growth of 21.8% in the most recent quarter. Also, B&G's adjusted net income increased almost 22% to $20.7 million in the quarter but missed consensus estimates.
The company plans to continue taking advantage of low interest rates for further acquisitions in an attempt to improve its product portfolio and increase its addressable markets.
However, B&G is facing pressure on account of competitive pricing, and acquisition-related costs have slowed earnings growth to some extent. But these short-term pains will result in long-term benefits once the acquisitions are fully integrated. In fact, B&G has already started seeing the positive effect of its acquisitions. In the fourth quarter, around 30% of its net sales came from acquisitions.
B&G has been promoting its various brands so that it can gain more traction. For example, greater promotional activity surrounding the Ortega brand resulted in an 11% increase in volume in the most recent quarter. However, brands such as B&M did not yield good results despite promotional spending. So B&G must improve on this front to eliminate ineffective promotions.
B&G will be launching more products in the Tier 1 category this year. According to the company, Tier 1 brands are those on which B&G will be spending aggressively, and they include Ortega and Mrs. Dash; both are growing at a fast pace.
The company has already seen some success in this department. In 2013, Mrs. Dash slow cooker and seasoning packets in addition to Ortega Fiesta Flats were picked by Better Homes and Gardens as the best new products in their categories. Encouraged by this performance, B&G is looking to maximize its opportunity in this segment by introducing new products.
In Tier 2, which is defined as a stable category and carries higher margins than Tier 1, B&G has also been growing. B&G expanded its Tier 2 line from three to six items and is rolling out all these products in the U.S. and Canada. B&G has successfully expanded Tier 2 product Maple Grove Farms in recent times, as the brand has reported a sales increase every year since it was purchased in 1998.
Why acquisitions are key to growth
As discussed earlier, we have already seen that B&G acquired four brands last year. The company has already made good progress in integrating these acquisitions into its existing business. For example, the New York Style acquisition contributed $12.9 million in net sales in the most recent quarter, an increase of around 12% compared to the prior-year period. Yet it will require a lot of homework on B&G's behalf to catapult this brand. In addition, TrueNorth was able to achieve the top end of its estimates, with $4.5 million in sales.
Rickland Orchards also performed well, generating $13 million in sales during the first month of its ownership. The company expects this acquisition to grow at a good pace in the future, as Rickland sells Greek yogurt products. This is where B&G will face competition from General Mills, which has been aggressively pushing its Greek yogurt sales.
After losing market share in Greek yogurt in recent years, General Mills is now focusing on innovation to increase its stake in this department. It has reformulated its standard Greek yogurt, and its lower-calorie Yoplait Greek 100 is also gaining momentum. General Mills' Yoplait Greek 100 generated $150 million in revenue in its first full year and was the company's biggest-selling new Yoplait product in two decades. With a single-digit share in the U.S. Greek yogurt market, General Mills has room to grow.
On the other hand, peer TreeHouse Foods is also expanding its base rapidly through acquisitions. Last year, TreeHouse acquired Associated Brands and Cains Foods to bolster its private-label products. Associated Brands provides private-label packaged-food products to 50 of the largest food retailers in North America. So this acquisition has given TreeHouse a big advantage to lift its sales.
The bottom line
B&G hasn't gotten off to a good start this year. But looking ahead, its prospects look bright. The company has made some good acquisitions to improve its standing in the market, and these have already started producing results. In addition, the company is also launching new products. So this could be a good time for investors to enter B&G, as the stock is in pullback mode but looks well-positioned for the long run.
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Mukesh Baghel has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.