Source: Boulder Brands
Niche food manufacturer Boulder Brands (BDBD +0.00%) has become a strong story in the packaged food space as it has built a diversified roster of natural/organic brands, led by Udi's and Glutino in the gluten-free category. The company has also anecdotally benefited from a rising consumer preference for packaged foods made from healthier ingredients, a trend that has provided a similar tailwind for competitor Hain Celestial Group (HAIN +8.00%).
However, Boulder Brands' latest financial update was a bit on the weak side; a decline in its adjusted operating profit spooked Mr. Market, which caused a subsequent double-digit decline in its share price. So after a price haircut, does the company remain a good bet?
What's the value?
Once a sleepy butter spreads manufacturer, mostly under its Smart Balance brand, Boulder Brands has become a fast growth story through a string of acquisitions that included its latest purchase in December 2013, which added the Evol frozen food brand to its portfolio. While the debt-fueled growth strategy has added leverage to the company's balance sheet, it has also generally improved Boulder Brands' operating profitability and cash flow generation, fueling its ability to fund further product development and an extension of its franchise into new areas.
In its latest fiscal year, Boulder Brands continued to build on its recent growth story, reporting a 24.8% top-line gain that was a function of a strong performance in its natural/organic unit. While the company's legacy Smart Balance unit struggled with falling sales during the period, with a decline of more than 9%, management's recent restructuring activities, including the outsourcing of milk production to a third party, helped the unit post higher profitability. More importantly, the restructuring freed up resources to invest in greater sales and marketing capabilities for Boulder Brands' natural/organic unit, thereby positioning it for greater product distribution and potentially higher profit growth.
Of course, Boulder Brands' latest fiscal quarter was a slightly different story, as its adjusted operating profitability slipped sharply; management blamed this data point on a sustained rise in the price of egg whites, a major ingredient in the company's bread products. On the upside, though, the company continued to generate strong revenue growth of 47% for the period in its natural/organic unit, and management indicated that it is working on a recipe adjustment that should hopefully help the company's operating margin rebound later in the year.
Looking into the crystal ball
The question for investors is whether sales for the natural/organic food industry have more room to run on the upside, which would thereby buy Boulder Brands' management time to fix the company's operational issues and return to profit growth. On that score, things are looking pretty good, given the recent results of major players in the space like Hain Celestial.
One of the sector's stalwarts, with a diversified portfolio of brands including Garden of Eatin' and Jason in the snacks and personal care categories, respectively, Hain Celestial has continued to post solid top-line growth in fiscal 2014 due to both organic sales increases and niche acquisitions. More importantly, a consumer shift toward healthier eating habits seems to be a global phenomenon, evidenced by sales gains for each of Hain Celestial's geographies. The net result for the company has been a broadening distribution network of more than 60 countries at last count, which has led to improved operating efficiency and strong profit growth.
Natural/organic food retailer Whole Foods Market (WFM +0.00%) has also continued to find top-line growth in fiscal 2014, reporting a 9.9% increase that was aided by solid comparable-store sales growth. While the company's results have underwhelmed investors, which led to a recent sell-off in its shares, it continues to find new customers, which is evidenced by an increase in sales volumes during the period. Just as importantly, Whole Foods sees consumer demand expanding for the foreseeable future, with a long term goal for its domestic store base that is three times larger than its current base of roughly 400 stores.
The bottom line
Boulder Brands is no doubt going through a rough patch, as it deals with ingredient price increases as well as the costs of building out its manufacturing infrastructure. However, with consumers anecdotally continuing to gravitate toward natural/organic food products, higher operating profit seems a likely result for the company over the long term and investors need to have Boulder Brands on their buy lists, especially at its currently depressed price.
