BNNY is getting tattooed after releasing its fiscal Q3 2014 results last night after the close. It reported Q3 EPS of $0.17 that missed consensus estimates by a penny and lowered its full year EPS guidance to $0.92 to $0.93 versus prior guidance of $0.97 to $1.01, citing higher input cost inflation ahead.
In what was otherwise a strong top-line with adjusted net sales in the quarter up 21.7% (Meals grew 34%; Snacks 15%; Dressing flat), with positive sell-through from previous areas of concern in frozen entrees and pizza, the company’s commentary suggests that it simply did not appropriately hedge/account for commodity cost inflation in the quarter (wheat in particular calling pricing an anomaly) – and begs the question how well it is covered for the coming quarters.
We continue to like the favorable consumer trends for natural and organic foods and BNNY’s portfolio of offerings (though frozen concerns do remain). We’re well aware that without prudent management of COGS in what we see as an inflationary macro environment in 2014, profitability will be challenged (HAIN reported similar headwinds). BNNY remains a rich stock (FY 2014 P/E at 40.9x), with no debt on its balance sheet that is expected to be cash flow positive next quarter, is investing in plant and people, and is now past this quarter that is expected to be its most difficult comp of the year.
The stock remains broken from a quantitative perspective across the intermediate term TREND duration, implying a bearish outlook. However we’d consider opportunistically trading the stock on the long side if our levels confirm it's oversold.
What We Liked:
- Adj. net Sales of $46.1MM up +21.7% Y/Y (excludes pizza recall)
- Adj. diluted EPS of $0.17 vs $0.15 last year, up +13.3% Y/Y
- Favorable trends in natural and organic foods
- Strengthening in mac & cheese and consumer acceptance of cups
- Frozen – pizza performing well and working to improve trialing thru merchandizing events
- Entrees remain mostly in Target
- Pizza full rolled out in Whole Foods, expanding foot print to other channels
- Snacks – fruit snacks trends strong. Crackers and Grams sales all grew 20%+
- Consumers saying want more Snacks offerings. Offering Cookies, Crackers and Snack mix in small packaging, positive for mainstream distribution
- Expanding distribution of granola bar, including gluten free bars
- Cheese costs covered for 1H of next year
- Expect EPS growth of 20% for Q4
What We Didn’t Like in the Quarter:
- Management lowers guidance for adjusted diluted EPS to $0.92 to $0.93, reflecting higher anticipated cost pressure in the fourth quarter
- Input costs tracking higher in Q4 due to wheat crops remaining tight. Impacting pricing in the short term
- Wheat inflation 18% in Q3, more modest in Q4
Matt Hedrick
