Sector financial performance:

This company, focusing on production of  breads, buns, rolls, snack cakes, and tortillas, has been grouped into fresh breads sector of bakery industry.

 For long run, bread retail has been providing stable demands for the products that this company sells. The stable sales volume data of recent years also presents consistency with our conclusion that demands for fresh bread of US market in terms of sales units have changed in a very small range (+/- 1%) and selling price may go up lightly. Premium products such as organic breads seem growing faster than other categories. However, the data from 2017/18 indicates that there may be a downturn trend (1-3% down annually) in non-retail bread market especially from vending and food service market while retail price has been rising.

The pressure from declining demands and increasing ingredient costs is hurting this company’s margin:  gross margins (44% distribution costs excluded), operating margins (6%), and cash flow as percentage of sales (3.5%).

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Company performance:

It seems that demand for product of this company from retail has been strong as indicated by its ability to raise retail price and increase in its organic retail product. However, demand from food service and vending may be decreasing as indicated by decline in volume.

For 12 weeks ended at 20181008 compared with same period of 2017

Sales decreased 1% (organic) due to decrease of 3.5% in volume offset by increase of 2.5% in price/mix.

For the first 40 weeks of fiscal 2018 compared with same period of 2017(ended 20181008)

Sales increased 0.8% (organic) due to increase of 1.6% in price/mix offset by decrease of 0.8% in volume. Sales from retail increased due to increase demand for organic products. However, contract manufacture and food service sales decreased due to decrease in volume.

For fiscal 2017 compared with 2016

Sales increased 0.4% (organic) due to increase of 0.6% in price/mix offset by decrease in volume. Sales from retail increased due to increase demand for organic products. However, contract manufacture sales decreased.

For fiscal 2016 compared with 2015

Sales decreased 0.1% (organic) due to decrease of 0.3% in price/mix offset by decrease of 0.2% in volume.

It seems the demands for fresh bread and other bakery products of this company have been kept stable. For example, the organic sales volumes basically have no changes in 2015 and 2016 (+/-1%) even though volume went down by 2% as the average price down by 2% in the first 6 months of 2017.

Gross margins have been improved lightly between 2015 and 2017, which were attributed to raising selling price in 2017, lower raw materials in 2016 and products mix in 2015. However, as ingredient costs went up in 2018, we have seen gross margin going down to 42% again in 2018 while retail price went up.

The SG&A as percentage of sales increased in 2016/17 due to increase workforce-related costs after acquisition and due to extra consulting fees of $8 million. SG&A% was improved in 2018 ( 38%) and help generate an about 6% operating margin.  

Stock price

This stock currently has an enterprise price/EBI ratio of about 31. Considering that it is in a mature sector with stable demands for its well-known bakery products and its relative low debt/asset ratio of 30%, our valuation methods and analysis concluded that the market may currently fairly value this stock.

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