Sector financial performance:

This company, which primarily manufactures and distributes shelf-stable grocery and frozen food, has been grouped into frozen& shelf-stable food sector in food industry.

Our company data indicate that this is a sector with a few of years’ declining growth in demand for its frozen and shelf-stable grocery products, which, excluding economy elastic impacts of price, were presented in declining trend of the sales volume numbers. The trend seems to have been quite consistent in both categories of products while demand for frozen food presented an earlier and larger rebounding as indicated by positive growth in volume in 2018.

As it always happens in other sector of food industry, when the demand slows down it is always more difficult for companies to pass on increased costs to the retail price since consumers may be very sensitive to raising price. It is what has been happening for traditional shelf-stable grocery. Sales volume significantly fell down when companies managed to raise price to keep their margin.  Demand for frozen food seems to have stronger resistance to raising price. However, the volatile price of commodity in the past several actually has made more difficulties to maintain stability of their profitability.

Companies’ gross margins (sector average from 27% of 2014 up to 31% of 2016 and down back to 27% of 2018) seem to be quite volatile under impact of changes in selling price, commodity costs, and warehouse and distribution costs.  At the same time, because, at the current margin level, the added profits resulted from improved margin are still able to offset the loss due to the resulted decrease in sales, we can see the increase in profits when the selling price goes up in 2015 and 2016 and decrease in profits when the average selling price deceased after entering fiscal 2017.

According our analysis, a typical ratio of enterprise price/adjusted EBI is 31with interest/EBI ratio of 40%. 

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Company performance:

The spin-off of this company’s commercial segment caused many difficulties for us to make a comparable analysis of this company’s performance especially considering the inconsistency that their financial data presents.

It seems the demand for this company’s products both in shelf-stable grocery and frozen food had decreased before 2017 as indicated by continued shrink in sales volume of frozen food ( down 3-8% annually) and grocery food ( down 3-5%  annually).  The declining volume seems to have been offset slightly by increasing price or mix of products. It also certainly is possibly a result of competition in terms of quality of their products and brand awareness. The decline seems to be rebounding in 2018 as indicated by the general increase in volume and price of both frozen and shelf-stable products.

For first quarter of fiscal 2019 compared with the same period of 2018 (ended 20180826)

Organic net sales for shelf-stable grocery products was flat all attributable to the flat sale volume and pricing. Sales for frozen products increased 1% attributable to 1% increase in pricing and flat volume.

For fiscal 2018 compared with 2017 (ended 20180530)

Organic net sales for shelf-stable grocery products decreased 2% all attributable to the decrease of 2% in sale volume due to the reduced trade promotion. Sales for frozen products increased 3% attributable to 3% increase in volume and 0% increase in price.

Organic net sales for shelf-stable grocery products decreased 5% in fiscal 2017 all attributable to the decrease in sale volume due to the reduced trade promotion. Sales for frozen products decreased 8% attributable to 9% decrease in volume and 1% increase in price.

Organic net sales for shelf-stable grocery products decreased 4% in fiscal 2016 attributable to the decrease of 5% in sale volume and 1% increase in price. Sales for frozen products decreased 4% attributable to 8% decrease in volume and 4% increase in price.

Organic net sales have no changes in fiscal 2015 either no changes in sales volume or sales price.

Due to continuingly increasing price and reduced commodity costs. We have seen that its margin has been improved in the past several years (gross margin up to about 30% and operating margin to about 13% in 2018).

Due to rising selling price and reduced commodity costs, we have seen an improvement in its gross margin (about 30% in 2018) and operating margin (about 13%) in the past several years.

For fiscal 2017, operating profits increased by 10% and 6% for grocery and frozen food respectively mainly because increased selling price and reduced commodity costs. For fiscal 2016, operating profits increased by 1% and 12% for grocery and frozen food respectively mainly because of improved gross margin with lower commodity costs. For fiscal 2015, operating profits increased by 19% mainly due to reduced SG&A spending

Stock price

This stock currently has an enterprise price/EBI ratio of 24 ($35/share), which we think, is relatively slightly overvalued when applying our analysis of the relationship between the ratio of price/sales and margins. I addition, we are not able to trace back the consistency from data that this company provide in their statements for the past several years, which have been restructured after the spin-off of its commercial business subsidiary.