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Summary Thoughts

  • “I would say that the competitive activity in this space has been very intense.” –John Foraker, Chief Executive Officer of BNNY
  • “Heavier competitive pressure and that pressure could be branded promotional pressure or some private label expansion.” –Greg Engles, Chief Executive Officer of WWAV
  • The battle in the mac & cheese category continues as both BNNY and WWAV say they are on track.
  • One of the more telling trends we are seeing of late is the shift in the grocery retail space.  As more natural-oriented retailers’ comps have slowed, the same-store sales for conventional grocers have improved.  Clearly, the bigger grocers are doing a better job focusing on natural and organic as a core initiative to try to draw customers into their stores.  In addition, fierce competition among natural chains is driving notable cannibalization.
  • The mix shift to traditional grocers is adding incremental growth, but it’s coming at lower incremental margins.
  • Europe is a bright spot.
  • Inflation pressure remains an issue – dairy, almonds, organic wheat, etc.
  • BDBD and BNNY are both calendar 2H14 margin recovery stories.
  • WWAV said organic growth will decelerate from 11% in 2Q14 to 8-9% in 2H14.


WWAV remains the strongest company in the organic space and is on our Investment Ideas list as a LONG.  We note, however, that organic growth will decelerate sequentially from 11% in 2Q14 to 8-9% in 2H14.

WWAV’s top-line increased 36% in 2Q14 as a result of double-digit organic net sales growth, which was over 11% in the quarter.  Excluding Earthbound (and joint venture-related investments), organic operating income grew more than 2.5x the organic top-line growth rate, with operating margins expanding by over 100 bps.

Sales were up 38% in North America, including up more than 8% on a purely organic basis.  Top-line results were driven by strong growth across all platforms, with plant-based beverages, coffee creamers and premium dairy all producing strong growth rates in 2Q14.  The most recent acquisition, Earthbound Farm, grew by double-digits again in 2Q.

Organic growth guidance: Top-line guidance also includes an organic growth rate that the company expects to be in the 8-9% range in 2H14, with Europe being accretive to overall growth.

Plant-based beverages: Plant-based beverages grew 17%, led by almond milk growth of over 40%.  Almond now represents almost 70% of the total plant-based beverage category.  Silk almond milk continues to be a key driver of this growth, as sales grew by 45% in 2Q14 off an already sizeable base.

WWAV is the plant-based market leader, with Silk holding a 56% share of the total category and holding the number one position in the almond, soy and coconut subcategories.

“All major national branded almond milk players saw share pressures.  We saw a step-up in both private label almond milk distribution expansions at a major retailer, plus we saw continued promotional pressure in the segment.”

WWAV continues to experience exceptional growth in Europe, with the plant-based segment reporting sales growth of 26% (18% on a constant currency basis) in 2Q, consistent with the strong growth it experienced in 1Q.

Horizon: “Our recently launched snacking line platform is performing very well, and as we expected, we experienced heavy competitive activity when we entered the mac & cheese category, but continue to be pleased with our results today.”

Management is confident about the potential of the brand: “The rollout of our new center store Horizon product continues to grow in-line with our expectations.  It will be some time before these brand extensions become material to our results, but we remain encouraged by the strong repeat usage we’re seeing and increased levels of distribution we’re achieving.”

Organic milk grew 8% in the quarter, ahead of expectations, and accelerated from 2H13 when growth was closer to 5-6%.

Organic packaged salads: The organic packaged salads category continues to grow rapidly, up 18% in 2Q14.  WWAV’s share of the total organic packaged salad category increased by 2 points to 24% in the quarter.  Earthbound Farm continues to maintain a leading 55% share in the branded organic packaged salads segment.

Coffee and creamers: The coffee creamers and beverages platform grew 5% in the quarter, as WWAV continues to experience a negative overlap within iced coffee as a result of enhanced competitive pressure in the back half of last year.  The premium dairy platform delivered top-line growth of 8% in 2Q14, despite an approximate 1% drag on asset sales.

BDBD: Strong Organic Growth and Declining Margins

We have a favorable view of BDBD and it remains on the Watch List as a potential LONG.

Total net sales increased 18.7% in 2Q14 as organic net sales increased 19.4%, well ahead of the company’s 13-18% guidance.  Organic growth in the natural segment, which includes EVOL, increased 34.8%.  The gluten-free brands, Udi’s and Glutino, reported strong net sales growth of 26.9%.

Gross margin was 35.7% in the second quarter, a decline of 610 basis points.  This decline was primarily related to the increase in egg white pricing, which negatively impacted gross margin by 210 bps, as well as a mix shift to lower gross margin natural brands.

The company made a number of changes in 2Q that should begin to payoff in 3Q.  We believe the combination of a price increase, formula changes, cost reductions and securing egg whites for the balance of the year will lead to a strong rebound in gross margins in 2H14.

The company also reaffirmed its guidance for the balance of FY14, which includes:

  1. Net sales to be in the range of $540 million to $550 million
  2. Organic net sales growth in the 13% to 18% range, with the Natural segment expected to come in at the high end of the range of 25% to 30%, and Balance to be flat to slightly positive.
  3. Adjusted EBITDA to be in the range of $89 million to $91 million, EBITDA to be in the range of $79 million to $81 million
  4. EPS to be in the range of $0.39 to $0.41 per share, based on 64.1 million shares outstanding.
  5. 3Q14 EPS of $0.10 to $0.12
  6. 4Q14 EPS of $0.18 to $0.20
  7. Gross margin to improve to 41% by year end from an average of 37% in 1H14

BNNY: Strong Organic Growth and Declining Margins

BNNY remains on the Hedgeye Best Ideas list as a short.

Consumer demand for Annie’s products remains very healthy, despite a more competitive environment.  In U.S. grocery, BNNY’s number of distribution points increased 10% year-over-year and its market share was up 100 bps despite seeing increased competition in the mac & cheese category.  Having said that, an increase in trade spending is negatively impacting gross margins.

Consumption increased in the high teens during the quarter, driven by very strong baseline performance in all sales channels and in most categories.  BNNY continues to benefit from driving mainline distribution in conventional grocery stores.  Consumption trends in the natural channel remain very strong, growing at approximately 9% in the quarter.

Organic wheat prices remain at historically high levels, up ~40%.

BNNY’s gross margins continue to be under pressure, due in large part to inflation and increased trade spending.  The company expects to realize a 4% price increase in 2HF15 to improve the margin structure of the company.  Gross margins should approach the mid-thirties during this period.

The company is guiding to strong earnings growth in 2HF15, as they benefit from mid-year pricing actions and productivity gains.  Guidance is for adjusted net sales growth of 18-20% and adjusted diluted EPS of $0.88-0.95; we remain skeptical that this will happen.

Howard Penney

Managing Director

Matt Hedrick


Fred Masotta