This Company Looks Good To Go, Despite A Mixed Quarter

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Oct 30, 2014

Consumer spending in the U.S. rose 0.5% in the month of August over the previous month. This is mainly because of the increase in people's incomes, which resulted in higher spending. Thus, people are expected to spend more on the most important thing, which is food. The food industry should definitely witness the gains. However, there are some exceptions which are facing other problems despite an increase in demand.

B&G Foods (BGS, Financial) is working hard to overcome its existing problems and perform well. However, its recently reported third-quarter results were mixed, enabling its share price to fall. Let us dig deeper.

Snapshot of the numbers

Revenue jumped 15% to $209 million as compared to the previous year's quarter but was below the analysts' expectations. However, demand for its products was on the rise as reflected by an increase in volumes of 1.4%. Increase in volumes was partly offset by a drop in product prices of 0.8%, resulting in an overall increase of 0.6% in the base business. If the product prices were the same, the company could have met the analysts' estimates.

Weakness in segments such as Underwood, Cream of Wheat, B&G Pickles and New York Style affected the top line. Also, the Rickland Orchards business, acquired last year, did not perform well. Revenue from Rickland Orchards' sales-to-club channel is on the decline, enabling the company to lower its sales projections from this segment.

Some positives

Nonetheless, there were some segments that performed extremely well. The best category was Pirate Brands, which registered a growth of 39% in sales, as the food retailer's relationship with warehouse clubs benefited. Also, the snacks business did well as demand for B&G Foods' snacks surged.

Furthermore, B&G acquired Specialty Brands, a packaged food provider, in April. Through this acquisition the food company strengthened its product portfolio and added dry soups and other products to its list of offerings. Therefore, Specialty Brands added $22 million to the top line of the company and should continue to do so after the integration is completed by the end of this year.

But the gross margin of the company shrank 360 basis points to 30.2% over last year's quarter. This was mainly because of the increase in the prices of the products and higher sale of low margin products. Also, the write-off of raw materials as well as finished goods resulted in higher expenses. Thus, the bottom line too was below analysts' expectations, at $0.38 per share. However, it was higher than last year's earnings of $0.35 per share.

Brighter future awaits

The company's export business, too, grew 6% over last year as expansion in Brazil helped attract more customers. B&G Foods does not plan to change its promotional activities since the existing marketing plan is benefiting the company. It did witness volume gains during the quarter and expects the volumes to increase further in the upcoming holiday season. The recent acquisition of Specialty Brands and the success of Pirate Brands should add to the growth of the company. Therefore, B&G Foods looks like an interesting bet, despite a lower than expected quarter.