Source: Annie's website 

On the surface, natural and organic foods maker Annie's (UNKNOWN:BNNY.DL) has everything going for it. The market for organic foods is booming, having generated some $28.4 billion in U.S. sales in 2012 and capturing a modest 4% or so of overall food sales, according to the Nutrition Business Journal cited on the U.S. Department of Agriculture's website. This presents a wide runway for growth, and in fact organic food sales are expected to climb to $35 billion this year. 

But for all its promise, Annie's has been feeling the flames from all sides amid an inventory adjustment by a key customer exacerbated by muddled financial reporting. The stock is down 26.5% in the past year and the company's outlook has been marred. Does all this turmoil create a value investment, or will Annie's only cause you indigestion? Let's take a look. 

Get a grip 
In its latest earnings report, Annie's had a mixed showing, the best of which was reflected in the top line. Adjusted net sales were up 16% and 19% to $60.1 million and $204.1 million for the fourth quarter and fiscal year, respectively. And consumption trends are strong amid robust consumer demand, "running in the [plus] 20% range," according to the company's earnings release. 

But for all the top-line momentum, Annie's failed to impress on the bottom line, where it missed its own estimates. Food inflation in commodities such as organic wheat took management by surprise and pressured the bottom line. What stings is that in its fiscal third quarter earnings report, Annie's lifted in its fiscal year 2014 earning-per-share guidance, which was a misstep. Annie's called for adjusted diluted EPS of between $0.92 and $0.93 and reported adjusted diluted EPS of $0.86. In the earnings release, Annie's execs said they're working on it: 

We have improved our forward cost coverage of organic wheat, and are broadly building capabilities across our supply chain to keep pace with our growth. We are also taking the necessary steps to improve both our execution and the predictability of our financial results. 

Nonetheless, the company is an inefficient mess. Margins are under pressure and expenses are on the rise. And despite its best hedging efforts, high commodity costs won't ease any time soon, and that's weighing on the company's outlook. For instance, Barron's said:

Fiscal 2015 margins will likely be pressured by persistently high-organic-wheat costs, increased selling, general and administrative (SG&A) spending, and stock-based compensation that may not be offset fully by higher pricing and productivity savings.

Not one but two elephants in the room
The first of these elephants is Annie's biggest distributor, United Natural Foods, which as the organic food maker's largest customer contributed 22% to Annie's net sales in fiscal 2014. United Natural, whose customers include the likes of organics king Whole Foods Market and traditional grocers like Safeway, is slashing its Annie's inventory. There's a risk associated with having a key customer, and the fallout for Annie's will involve as much as a 4% reduction in fiscal 2015 revenue.

In the below chart, you'll find an illustration of Annie's key distributor customers and their percentage contributions to Annie's net sales. You will also see the distributors' combined contribution to Annie's accounts receivable, as per Annie's latest 10-K filing. The filing doesn't name the distributors directly, but based on context, Customer A is United Natural. Any one of the three distributors could cause a disruption to Annie's in the event of an inventory adjustment.

 Percentage Contribution to Annie's Net Sales and Accounts Receivable
  Distributor A /Seemingly United Natural Foods Distributor B  Distributor C 3 Distributors' Combined Contribution to Accounts Receivable   
Fiscal 2014 22% 15% 13% 58%  
Fiscal 2013 25% 17% 11% 72%   
Fiscal 2012 25% 15% 11% --  

Annie's has a trend of relying on a small number of customers for its sales. In addition to using distributors, Annie's also sells direct to retailers, and in fiscal 2014 a combined 28% of net sales came from Target and Costco.

Annie's is projecting 18% to 20% net sales growth for fiscal 2015, but as noted that will be met with rising SG&A expenses and greater compensation costs.

The second and even more alarming elephant relates to Annie's accounting practices. In recent days, PricewaterhouseCoopers revealed it would be stepping down as Annie's accounting firm.

PricewaterhouseCoopers, according to an SEC filing, cited "an insufficient complement of finance and accounting resources," to which Annie's admits "material weakness in internal control over financial reporting" but contends that it didn't lead to any material misstatements in its financial results for the 2012-2014 period, only immaterial ones, the latter of which triggered audit adjustments. 

Nevertheless, PricewaterhouseCoopers can't get out soon enough and will cease to be the organic food maker's accounting firm by August or sooner. Ambiguity surrounding a company's financial reporting is never a good thing, so investors may want to wait for this to get sorted out.

Pricey play
For all the risk, you'd think that Annie's would at least offer a bargain, right? Not so. The stock is trading at a forward earnings multiple of 31.2%. The P/E ratio is competitive with that of rival Hain Celestial (NASDAQ:HAIN), which trades at a forward earnings multiple of 29.4. But Hain's premium is warranted, the company coming off a record third quarter for net sales of $557.4 million and a 22% jump in adjusted diluted earnings per share. It also lifted its fiscal 2014 net sales and earnings per share guidance in response to its recently finished acquisition of Rudi's Organic Bakery and better-than-expected quarterly results so far this year.

Foolish conclusion
Annie's, for all its potential, has a lot to overcome for the foreseeable future. Worse, the distance between the company and analysts, distributors, and accountants is growing. That alone should give investors pause before hopping into the stock.

The way that Annie's responds to its lost revenue, food inflation, and accounting ambiguities will probably set the course for its future in the organic food industry. Annie's is at a crossroads, and for the Foolish investor that seems just a little too speculative. While Annie's sorts out its mess, investors looking to participate in the organic food space may want to give Hain Celestial a closer look.