I have to admit, about a month ago I started to worry about WhiteWave Foods (NYSE:WWAV).
I've been a loyal consumer of their So Delicious coconut milk coffee creamer for years. It's easily the best low-calorie alternative to "real" creamer that I've found. Smooth and rich and creamy.
Or at least it was, until a bunch of crazed, carrageenan-hating agitators went and destroyed my favorite part of the morning and WhiteWave removed carrageenan, an all-natural thickener made from seaweed (what healthy eater has a problem with seaweed?) from its coconut milk creamers. Heart. Broken.
OK, I'm being a bit melodramatic, and WhiteWave has been working toward removing ingredients like carrageenan (which can be processed in a way that's not exactly healthy) and titanium dioxide from its products for a couple of years now. When your core consumers speak, you listen. I guess I'm not a core consumer...
Now that I've gotten that rant out of my system (there's a happy ending -- you'll see) let's talk about what really matters: Q2 earnings. As of this writing on Friday morning, WhiteWave stock is down about 3% on results that were either better or worse than Wall Street's expectations, depending on which media source you rely on.
Instead of worrying about analyst estimates, let's take a look at how the business is executing on expansion from acquisitions, organic sales growth of its core products, and how that's playing out. The quarterly results may bounce around a bit, but it's the long game that matters the most.
Why sales and revenue are growing faster than profits
Last quarter, WhiteWave reported net sales growth of 10%, operating income growth of 15%, and earnings-per-share growth of 7%. Taking out the impact of currency exchange, sales actually grew 14%, and earnings per share, adjusted for investments in Chinese venture as well as currency, increased 16%.
Let's be clear -- I'm not being an apologist or attempting to explain away the fact that earnings are growing at a slower pace than sales, but it's helpful to have some context on things. In this case, WhiteWave's investments in growth in China, plus currency exchange, took a bite out of profits last quarter. While currency exchange is cyclical and will be a benefit at times, it's largely uncontrollable in the short term. The company's investments in China, ideally, should lead to top- and bottom-line growth at some point. Historically, WhiteWave has done a good job of investing in growth, so eventually those investments should add to the bottom line.
Management also said that the company is spending to improve and increase its manufacturing footprint. These up-front expenses can take a temporary bite out of earnings, but it should lead -- over time -- to improved earnings power.
Two recent acquisitions
WhiteWave also recently announced two new acquisitions. The company is acquiring California-based Wallaby Yogurt Company for $125 million, and that transaction is expected to close in Q3, so it had no impact on the just-reported quarter. Wallaby's trailing annual sales of about $45 million were up 20% from the year before, so this is another fast-growing business that WhiteWave can integrate into its business. The company should also benefit from the additional manufacturing capacity on the West Coast that it gains with the acquisition.
The company also closed its $550 million acquisition of Vega in August. Vega makes plant-based nutritional foods like shake powders and bars, and reported 30% sales growth over the past year, reaching $100 million in revenue. This marks a big step into an $8 billion-plus market for the kinds of products Vega makes.
It doesn't expect either acquisition to have much impact on GAAP earnings this year, but that both should be slightly accretive (fancyspeak for increasing earnings) in 2016.
Increased full-year guidance
Based on results so far that have been better than the company expected, plus the additional revenue from the recent acquisitions, WhiteWave increased its guidance for full-year sales and adjusted earnings:
Debt expense -- and the impact on earnings -- was also forecast to increase, due to the use of some debt to help fund recent acquisitions, but the negative impact is expected to be more than covered by increased earnings per share as these acquisitions are integrated and add to the bottom line.
Even with foreign exchange challenges and the short-term impact of acquisitions on the bottom line, WhiteWave continues to operate pretty well. Organic sales (meaning sales of products the company has owned for more than one year) were up 9% in the quarter, which is a reminder that demand for healthier and organic packaged foods is a growth business. A further reminder is the company's consistent execution on acquiring brands that give the company opportunities to both expand in segments it already participates in, as well as into new ones with big potential.
As to WhiteWave's results versus Wall Street analysts, it's probably better to hold the company accountable to its own guidance, and it has consistently met or exceeded its own guidance. That's worth remembering.
I may not be happy with it, the company's decision to remove ingredients that some (wrong-headed though they may be) consumers want removed from key products is a step in the right direction. Besides, I can still buy the original "real-deal" creamer for my morning pick-me-up from WhiteWave:
So all is not lost after all.