Fast-growing organic food specialist Boulder Brands (BDBD.DL) has been riding a growth wave for the gluten-free industry niche thanks primarily to a timely purchase of the Udi's brand in 2012. While sales for the Udi's unit are still going great guns, the company has been looking to round out its product portfolio with additional acquisitions. This is evidenced by its recent purchase of Evol Foods, a maker of organic frozen meals. The deal adds another growth engine to Boulder Brands's empire, while helping it to compete with larger competitors, like Hain Celestial (HAIN 2.83%).
So, is Boulder Brands a good bet at current prices?
What's the value?
Boulder Brands spent most of its existence as a sleepy manufacturer of heart-healthy butter spreads and dairy products, generating most of its sales from its Smart Balance label. Unfortunately, those product categories are dominated by large, multinational food marketers, including J.M. Smucker and Dean Foods in the peanut butter and milk categories, respectively. This leaves little shelf space for niche players like Boulder Brands, making sales growth hard to come by.
Boulder Brands' management, though, was wise enough to recognize its competitive disadvantage in those product categories, causing it to engineer a business renaissance as a gluten-free heavyweight, which has led to a subsequent strong, multiyear growth trajectory.
In FY 2013, Boulder Brands has remained on the fast growth track, with a top-line gain of 30.9%, aided by the introduction of new products and a widening of its distribution network in the grocery business. More important, the company has been able to obtain greater leverage from its sales and marketing infrastructure, leading to a solid increase in operating profitability and cash flow. The net result for Boulder Brands has been more capital to fund its growth ambitions, including acquisitions and a larger company-owned manufacturing footprint.
The race for shelf space
Boulder Brands' move to diversify its product offerings certainly makes sense, as it opens the company to a wider potential customer base than just gluten-free adherents. The acquisition of Evol Foods also allows Boulder Brands to capture important shelf space in the crowded freezer section, a horizontal expansion of its brand that is necessary in order to maintain its growth trajectory.
Of course, Boulder Brands' competitors also have their eyes on securing as much shelf space as possible. Hain Celestial has also used the acquisition channel to build a strong and diverse product portfolio over the past few years, including top sellers like Garden of Eatin' and Jason in the snacks and personal-care categories, respectively.
The company's most recent acquisition, the purchase of rice manufacturer Tilda, furthered its diversification strategy by adding another new product category. The deal also opened sales opportunities for Hain's overall portfolio in new locales, like India and North Africa.
Hain has likewise been putting up some good numbers recently, reporting a 24.2% top-line gain in FY 2014. Despite a lower gross margin, due to rising raw-materials costs and the addition of lower-margin products, Hain has been able to leverage its existing distribution infrastructure, allowing it to roughly maintain its level of operating profitability. As a result, Hain's higher sales volumes are producing improved operating cash flow, providing funds for its acquisition-heavy growth strategy.
Organic grocery pioneer Whole Foods Market (WFM) has also been edging its way into a greater share of its own shelf space with a growing roster of private-label offerings, currently selling roughly 2,700 products that account for approximately 12% of total sales. Its focus on private-label offerings, as well as a heavy perishable food mix in its stores, has allowed the company to consistently post an operating margin well in excess of the razor-thin level typically associated with the grocery business.
More important, Whole Foods' strong cash flow has allowed it to rapidly expand its base of locations while providing ample funds for product-development activities.
The bottom line
Boulder Brands seems to have increased its shareholder value with its latest acquisition, lowering its reliance on the gluten-free category as well as reducing its overall business risk. However, the company is still under the gun to increase both its scale and brand ubiquity given the rising product-manufacturing ambitions of its distribution partners, like Whole Foods. As such, investors should let Boulder Brands' story mature a bit prior to betting on this upstart.
