B&G Foods (NYSE:BGS) posted impressive second-quarter results. It seems that the company’s good acquisitions in the past have accelerated its momentum. B&G saw a good improvement in sales on the back of such acquisitions. The ratios of the company also look promising as earnings are expected to grow at a CAGR of 13.95%. With the future looking bright, B&G can be a good long-term holding. Let us have a closer look at the underlying business.
A look at the results
In the recently reported quarter, B&G’s sales improved by 26.1%, and it also reported robust cash flow. The company was stressed in many ways, but the acquisitions came in as antidotes that released pressure. But management thinks that it is not performing up to its expectations.
There are many key points on which B&G is lagging. It is seeing weakness in the shelf business, which is already a challenging segment for the food industry for the past several years. However, B&G saw a slight improvement in the core business on the back of the Easter holiday. It has seen tremendous performance from various brands. For example, Ortega saw good growth in the volume by 10%. B&G’s new line of seasoning mixes, Crock Pot, saw good traction reporting a 100% increase. On the other hand, the only brand which declined was the Wheat Brand.
- Warning! GuruFocus has detected 9 Warning Signs with BGS. Click here to check it out.
- BGS 15-Year Financial Data
- The intrinsic value of BGS
- Peter Lynch Chart of BGS
B&G’s promotional activities were good enough for brands such as Ortega, Polana and B&G brand to improve the net sales by 1.1%. However, the money spent in promotional activities hurt the profit margins. To maintain a good price level, in the second half of the fiscal year, the company is going for promotional activities.
Trying to improve
As B&G is losing in supermarkets, it wants to keep its base business competitive. Under this, it is undertaking judicious promotional activities and also bringing in new products. Some of the new products coming out of its product pipeline include Ortega Fiesta Flats and its Ortega Taco Kit for Two. It is also expanding the Crock Pot line of seasoning mixes in wheat products, which was declining. It is also bringing in three new Cream of Wheat products, which will surely help it strengthen its position.
The cost issue is a matter of worry for B&G. The company was inefficient, which resulted in weak results in some key areas. The limited space in the warehouse is the key reason which cost B&G. This ultimately increased the cost. In order to cut costs, B&G has shifted its three major warehouses to a larger facility. In addition, the company is trying to alter the order and the shipment patterns on snacks to prevent more direct shipments from the manufacturing point, rather than combining products with its grocery products in B&G Foods' warehouse.
The launch of New York Style, Old London Brands in 2012 happened to be a wrong move by the company, and it saw a decline as a result of the distribution loss at single customer. B&G is aiming at bringing it to profitability by relaunching it with refreshed packing and new contemporary flavors. Further, B&G is counting on the TrueNorth brand, which it acquired in 2013. The brand performed well in 2013, and the company is expanding the distribution of this line to make it more attractive.
Also, Pirate's Booty Crunchy Treasures and Pirate's Fruity Booty in the snacking portion of the business, and Pirate's Booty Mac n Cheese in four flavors in grocery are also seeing good responses and are expected to see strong demand in the future.
The fundamentals of the company are solid. But lower guidance and the brisk cost cutting initiatives don’t look promising. However, the company is trying to get better in the long run, and this is why it is making moves in that direction. Hence, investors need to look beyond B&G's short-term issues as it can be a good long-term holding.