Keebler Crunching Up the Sales (News) November 4, 1999

Keebler Crunching Up the Sales

By Richard McCaffery (TMF Gibson)
November 4, 1999

How sweet it is.

Cookie and cracker manufacturer Keebler (NYSE: KBL) reported net income of $32 million for the third quarter, an 18% increase over net income of $27.3 million from last year as the 146-year-old company cashes in on its "New Products Explosion" campaign.

Diluted earnings (before extraordinary items) jumped 12% to $0.37 per share, up from $0.27 a year ago.

The country's second-largest cookie and cracker maker has recently introduced 17 new products, including Crunchy Walnut Chips Deluxe, Snackin' Grahams, and Cheez-It Get Nutty. This quarter's standouts are Rainbow Vanilla Wafers and Snax Stix, as well as a little packaging wizardry in the form of resealable bags for its snack crackers.

Keebler manufactures cookies under the Keebler, Cheez-It, Carr's, and Famous Amos names. It's the leading licensed supplier of Girl Scout cookies, the number one manufacturer of private label cookies, and number one manufacturer of crackers for the foodservice market.

It's also a powerhouse in the world of ice cream and pastry infrastructure as the number one manufacturer of retail branded ice cream cones and preformed pie crusts.

Flowers Industries (NYSE: FLO), which has been struggling due to production problems at its Mrs. Smith's Bakeries, owns 55% of Keebler. (For more information on Flowers' woes click here.)

For the quarter, sales hopped 23% to $616 million, up from $500 million a year ago. Truth be told, however, the bulk of sales growth came from the September 1998 acquisition of President Baking Company. Excluding this, sales jumped 7.7%, which is still very respectable and ahead of the industry average. Net income for the first 40 weeks of 1999 fell $17 million to $43 million as a result of charges related to a facility closing and the write down of non-performing assets.

For the year, analysts expect the company to report earnings of $1.42 per share, up 29% from earnings of $1.10 a year ago. Long term, analysts expect annual growth of 13%, compared to $11.9% for competitor and number one cookie and cracker manufacturer Nabisco (NYSE: NA), according to IBES International.

Overall, productivity gains, cost reductions, and consolidation have helped Keebler reward shareholders even though its stock price has trended down to about $32 from a 52-week high of $40 1/2 reached early this year. Keebler's return on average equity (ROE) stood at an "uncommonly good" mark of 34% last year, up from 29% the year before and well ahead of arch rival Nabisco.

Despite steady sales improvements, the main issue for investors to consider going forward is the sustainability of sales growth. The cookie and cracker business is a slow growing, mature industry, and it's unclear how companies like Keebler and Nabisco can make significant further gains.

At the end of last year, Keebler had a 25.7% share of the $8.5 billion industry, while Nabisco had a 33.7% share. Unless U.S. consumers start eating a lot more than $8.5 billion worth of cookies and crackers, where will Keebler's big gains come from?

The company believes non-supermarket channels represent areas of potential growth, but Keebler will find stiff competition from other vendors in these areas as well and growth will rely upon capturing market share. The company's sales are primarily domestic, so international markets could hold potential if it chose to compete globally. This has been a marvelous strategy for Coca-Cola (NYSE: KO), and Gillette (NYSE: G).

Investors need to reach their own conclusions on Keebler's sales potential and adjust expectations accordingly, but management seems to have the company on the right track and the quick integration of President has been impressive.

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