Sector financial performance:

This company was grouped into cookie, cracker &snacks sector of food industry, a sector that generally manufactures diversified products including pretzels, crackers, chips, cookies, popcorn, nuts, dry meat snacks, frozen fruit and beverages, and bakery dolls and distribute them to retailers or directly to food services.

Products include biscuits, bread dough items, roll dough items, dry sausage products and beef jerky.

Generally the demand for snack of products in this sector has been not strong especially retail channels. Demands from food services have kept increasing probably driven by recovering food service industry. Companies have been using promotion or lowering price to deal with competition and weak demand and it seems that demand’s elasticity to price varies among categories.

Demands for baked snacks such as cookie, cracker, pretzels, and chips have grown but very slowly (about 1-2% annually depending heavily on promotions) in the past several years, slower than that for the food manufacture industry. Demands for bakery dough items are doing the same as manufactured snacks. Demands for frozen fruits seem to be shrinking (5-8% decrease annually). However, demands for dry meat products provided the best performance in the general snacks market (average 7-10% growth in the past several years annually).

Increasing pressure on slowing down demands led companies frequently to look for promotion/lowering selling price to deal with competition and boost the their own sales numbers. We are not sure of what role the promotion plays in building of brands in a long run, in a short term promotions harm those companies’ margins and profitability when, since those companies’ margin are already at low level, the lost earnings resulted from lowering price cannot be offset by the gained earnings resulted from increased revenues stimulated by lowered price. This is certainly because of depressed demands but, more importantly, it is probably because of margins that are already at very low level due to competition.

Gross margins are about 30%-36% and operating margins are about 7% -10% for regular baked snacks companies depending on their distribution channels (retailers or food service). According our analysis, the ratios of enterprise price/adjusted EBI for those companies depending on retail channels reach 50 with debt/asset ratio of 15%.

Gross margins for meat made snacks keep 33-36% with 5-6% operating margin. And the ratios of enterprise price/adjusted EBI for those companies reach 29 without any debt.

Gross margins for companies with frozen fruits as core products range 18% -19% with a 6% operating margin. And the ratios of enterprise price/adjusted EBI for those companies reach 23 with 30% debt/asset ratio.

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Company performance:

Our analysis indicates that demands for this company’s meat snacks products has been picking up and became the major driver for growth in the past several years. Another major segment for frozen dough items contributed a little to the growth.

For first 36 weeks of fiscal 2018 compared with same period of 2017 (ended 20180713)

Sales increased about 6% due primarily to increase of 8.4% in sales volume offset by decrease of about 2% in price.

For fiscal 2017 compared with 2016 (ended 20171103)

Sales increased about 19% due primarily to increase of 23% in sales volume offset by decrease of about 5% in price.

In the past two years (the first half year of 2017 and 2016), net sales of this company increased by 14% and 7.5% most attributable to the increase in sales volume for its meat snacks products  while the average selling price of meat snacks products varied due to promotions and sales’ shifting to higher value products such as beef snacks.

The sales of its meats snacks went down by 2.2% in 2015 compared with 2014 mainly because of the falling volumes after the significant promotions in 2014.

Correspondingly, gross margins increased from 29% of 2014 to 39% of 2016 mainly because of the raised prices for its meat snacks after the huge promotions of 2014, decreased labour expenses, and reduced commodity costs, and went down to about 34 of 2018 due to decreased prices.

The absolute numbers of SG&A fluctuated between -10% and 15% in the past three years, which is relatively small as percentage of sales and also consistent with patterns of changes in sales. Therefore, this company’s operating margins seem, to large extent, to be determined by its average selling price, presenting about -3%, 6%, 7%, 8%, and 5% for 2014, 2015, 2016, 2017 and 2018 respectively.

From the increases in operating income (270% of 2015, 40% of 2016, 21% of 2017, and -34% of 2018) we can see promotion did not directly bring profits for this company, probably because of the nature of  low operating margins in this sector and as well because of the existing demands not strong enough for company to sell value-added products. However, we cannot underestimate the benefits that promotions brought in increasing company’s brands’ awareness.

Stock price

This stock currently has an enterprise price/EBI ratio of about 29($18/share), which we think is not accurately reflecting its good performance in margins and debt management but presenting concerns about its products’ future that may not be consistent with the current consumers’ preference for more natural and simpler snacks.

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