What fate befalls a producer of premium-priced food products in a coupon-clipping, trade-down economy? In the case of small-cap niche player Smart Balance (NASDAQ:SMBL), it is not the kicked-to-the-curb scenario you might imagine.
Bolstered by three price increases in 2008, fourth-quarter 2008 sales increased 28.9% year over year, with unit sales clocking a more modest 6% growth rate. The quarterly $0.04-per-share loss resulted from non-cash charges, some of which are expected to re-occur in 2009. Given that financial results on the whole were fairly positive, I am most interested in what apparent consumer trends imply for the company's near-term future.
At the core of Smart Balance's business is its line of heart-healthy buttery spreads, which represent 75% of company sales. This product group showed an impressive 1% market share gain during the quarter, yet offerings such as popcorn and oatmeal lost ground to other brands.
So what gives here? Do shoppers naturally gravitate toward Smart Balance spreads when confronted by the artery-clogging menace of the dairy aisle, but feel less compelled to differentiate among brands once they wheel on over to the hot-cereal shelf? Or perhaps a tub of Omega-3 Light Buttery Spread represents a low-cost-per-use purchase, while a three-pack of the company's microwavable popcorn comes up short on the value proposition?
Both explanations are plausible, but it is noteworthy that management cited less private label competition in the spreads business than other areas. This data point could be a coincidence, and sales results may be better explained by the consumer behaviors described above. Conversely, it is possible that bargain-hungry shoppers are choosing premium-priced, health-oriented foods only in the absence of numerous low-cost options.
Whatever the case, the 2009 outlook appears challenging for Smart Balance's new products, which include a milk line. I do not have doubts about the company's ability to maintain, and possibly grow, the existing spreads business -- my sense is that established brand loyalty will weather economic pressures just fine. However, in absence of future price hikes, which now seem unlikely given lower commodity costs, strong sales growth will depend upon the company's ability to gain ground on new products and attract new customers.
With a $600 million enterprise value, Smart Balance could make a mighty tasty takeover target for food aisle giants Kraft Foods (NYSE:KFT), ConAgra Foods (NYSE:CAG), or General Mills (NYSE:GIS). However, with the stock trading at an estimated forward price-to-earnings ratio of 48, nimble investors may want to buy Smart Balance at the grocery store but wait for a coupon on the Nasdaq.
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