B&G Foods Inc. (BGS, Financial), a processed & packaged foods company manufactures, sells, and distributes shelf-stable food and household products in the United States, Canada, and Puerto Rico. The company has grown on the back of accretive acquisitions of brands that the other companies are offloading.
However, not all the acquisitions have worked well, specially a string of four snack food acquisitions between late 2012 and mid-2013, which did not deliver as planned. For example, New York styles, Cream of Wheat, and TrueNorth brands did not live up to pre-acquisition expectations.
Despite this, the company started fiscal 2015 on the front foot and posted estimate-beating first-quarter results, and got a good response from Mr Market.
Looking at the quarter
The Ortega and Las Palmas recall had hit the company hard but B&G has recovered well from that stage and Ortega net sales increased 14% year over year, with approximately half of the increase relating to the restocking of customer shelf. Another highlight has been better-than-expected performance of the specialty brands acquisition.
Net sales increased 9.6% year over year to clock $217.1 million versus to $198.1 million for the first quarter of 2014. Analysts were expected $3.66 million less. Net sales of specialty brands contributed 22 million to the overall increase. The acquisitions which impacted the top-line negatively were -- 33.9% decline for New York styles, 8.5% for Cream of Wheat, and 18.8% for TrueNorth.
Gross profit as a percentage of net sales decreased to 160 basis points, or bps, primarily on account of customer refunds in the first quarter of 2015 relating to the Ortega and Las Palmas recall. Adjusted earnings per share came in at $0.38 versus analysts’ expectations of $0.33.
The processed & packaged foods company exited the first quarter with $1 billion in long-term debt, net leverage of around 5.1 times adjusted EBITDA, and current dividend rate of $1.36 per share per annum.
Initiatives to propel growth
In the second-quarter B&G is launching five new innovative Ortega products including two new tacos, Street Taco kids and Smoky Chipotle taco sauce. This is expected to drive growth of the brand in long term. Additionally, in January, the company increased prices by around 2% on an average. Despite the price increase, there has been no major impact in consumer sales behavior.
Pirates Booty brand was authorized in additional 1000 Wal-Mart (WMT, Financial) stores during the fourth quarter of 2014 and this had contributed favorably to top-line growth. B&G is planning to add additional Wal-Mart distribution as the year progresses.
In late summer, the company will be launching four flavors of Bear Creek hearty soup bowl in order to bolster the specialty brands, which is already performing ahead of expectations. Also, to give a lift to Cream of Wheat brand, B&G will be launching five new items of instant cream of wheat cups in the third quarter to appeal to the on the go customer.
B&G Foods is also contemplating a partnership with third-party service provider to help improve technology and develop better warehouse management systems, because distribution costs, which expanded by 80 bps, is hurting the profitability.
As a part of cost cutting initiative, the company pulled back from aggressive promotional activity and is not experiencing any negative impact on sales. Pricing increase and cut back on promotional activity is expected to deliver approximately $8 million to $10 million in incremental pricing during 2015, more than offsetting any pricing pressures during fiscal 2015.
Acquisition in the cards
Earlier this month, B&G Foods announced that it will be selling 4,200,000 shares of its common stock at a price to the public of $30.60 per share. The proceeds will be used for:
“… general corporate purposes, which may include, among other things, the repayment or retirement of a portion of B&G Foods’ long-term debt or future acquisitions, if any.”
So, there could be an acquisition in the cards as B&G Foods is a willing buyer, and that has been its business model for growth.
Acquisition that failed
One acquisition that really did not work out well was Rickland. Here what the new CEO Bob Cantwell said:
The Rickland run rate is really about a $1 million a quarter in sales, a little over a million, $4 million to $5 million in total for the year. So as we head through kind of comparisons versus 2014 I don't have handy, but 2014 second quarter was still reasonably okay for Rickland it was certainly less than first quarter. And then as you get into the third quarter we were really getting into this very low run rate. So you still got another quarter, maybe a quarter and a half of lapping much higher numbers that Rickland had last year.
So, B&G Foods has learned from mistakes and will not be repeating the Rickland style acquisition in the future.
Wrapping up
The company is doing well to cut down costs and also planning to bolster different brands through new product launches. The stock is a buy for long-term.
