Food firm Del Monte (NYSE: DLM) is boosting sales growth by acquiring food brands in the pet-product category. So far, it's unclear whether the diversification out of people food will pay off as higher costs are stalling the earnings improvements that investors demand. But there is hope.
This morning, Del Monte announced fourth-quarter and FY2007 results. Full-year sales jumped a nice 13.9% as acquisitions of privately held Meow Mix and Kraft's (NYSE: KFT) Milk-Bone pet foods were added to the company's other pet food brands and processed vegetable and fruit businesses.
Bottom-line details were murkier, as reported earnings fell more than 33% to $0.55 per diluted share. The results included $0.19 in acquisition-related and other one-time charges, but the benefits of a lower tax rate and higher prices were easily offset by "higher costs, lower volume, higher interest expense, and higher trade spending."
Long-term debt increased 57% as a result of the above acquisitions and now stands at just less than 60% of total capital, meaning Del Monte has a hefty debt load to work down. Interest expense is now eating up close to half of operating earnings, leaving less capital to benefit shareholders in the form of share repurchases and dividend increases.
Management believes that moves made during fiscal 2007 "substantially improved the earning potential and competitiveness of our company" as the increased emphasis on pet food brings welcome exposure to a faster-growing segment of the food business. Indeed, Petco and PetSmart (Nasdaq: PETM) are seeing rapid growth as consumers increasingly treat pets as an integral part of the family. In terms of direct competitors, Nestle and Colgate-Palmolive (NYSE: CL) have sizeable pet food divisions.
For the coming year, management sees a 5%-7% increase in overall sales, with a similar level of earnings gains, although "transformation-related expenses" will continue. The move to pet food could definitely help boost the company's growth profile, but until Del Monte convinces Fools it can be a consistent grower, they may want to keep it on a short leash in the investment doghouse.
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Fool contributor Ryan Fuhrmann is long shares of PetSmart but has no financial interest in any other company mentioned. Feel free to email him with feedback or to discuss any companies mentioned further. The Fool has an ironclad disclosure policy.
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