It is that time of year again. Defensive formations are forming on the playing field. Offensive formations are considering the wishbone formation. No, we are not referring to football. We are referring to the all-out blitz of girl scouts in their annual cookie sale. How can you, as an investor, profit from their enormous and successful endeavor? The key is the bakeries that produce the cookies. While they may appear to be small names, ABC Smart Cookies and Little Brownie Bakers are in fact owned by major consumer goods companies and household names. It would be basically inconceivable for any small to mid-sized bakery to produce 200M cookies up to US food standards within a small time frame with limited or marginal other business and with small or non-existent margins. As such, let's put this noble scenario aside and the fact that the local troops and councils may or may not receive a large portion of the profits. We will save that discussion for another time. We agree as per the Girl Scouts that "Selling cookies teaches goal setting, decision making, money management, people skills, and business ethics-aspects essential to leadership, to success, and to life." In addition, in terms of the parent organization, "Girl Scouts of the USA is paid a royalty by its licensed bakers for use of Girl Scout trademarks based on gross annual sales. Girl Scout councils do not provide any portion of their cookie revenue to Girl Scouts of the USA, and no other revenue from cookie sales goes to Girl Scouts of the USA," according to the Girl Scouts.
Sales of Girl Scout cookies were approximately 210.66M boxes in 2013. This is based upon an average selling price of $3.75 and revenue of 790M. Projections for 2014 are sales of 210M or more based on our calculations. Unfortunately or fortunately (for those on a diet), sales last until only mid-March. As such, it is a very short selling season. What is interesting is that the baking is regionalized to meet demand and the local GS councils can select which baker they prefer. It is actually similar to many distribution models for finished goods and other food products. The difference is a regional council of a national non-profit deciding the quantities of the product that will meet demand. In terms of marketing, it was decided many years ago to use generic bakery names to brand the cookies. Consumers in general would balk at paying a high price for consumer food brands even if a portion of net income went to the scouts. In addition, the national brands did not want to confuse consumers, especially with a non-profit conducting the grassroots marketing albeit with names like Thin Mint and Tagalongs (to name our favorites). For Keebler to market Thin Mints or Samoas (another favorite) during the summer would cannibalize the Scouts' efforts and would cause negative PR, especially if the cookies were sold at half the price.
Now that has been determined, annual (or seasonal in this case) revenue can be determined. With a cost of approximately $3.50-$4.00 (depending upon local troops' pricing), that translates to total revenue of approximately 790.0M (using the mid-point of $3.75 per box) with current and forecasted sales of approximately 210M. Little Brownie Bakers is owned by the Keebler Brand and is wholly-owned by Kellogg Company (K) of Battle Creek, MI. ABC Smart Cookies (quite a generic name) is owned by Interbake Foods LLC. of Richmond Va, and is wholly-owned by the Canadian firm George Weston Ltd. Kellogg Company shares trade on NYSE and closed at $59.83 on January 24, 2014. Gorge Weston trades in Toronto under the symbol of (Wn) and also trades on the OTC market with the symbol (OTCPK:WNGRF). It closed at (CAD)$77.28 and (USD)$71.84 respectively, on January 24, 2014. The difference in price is attributable to the Canadian dollar at approximately (USD)$1.097. The two large consumer food companies will receive approximately 24%-26% from each box sold. The approximate price per box paid to the bakers is $0.9375 (.25x $3.75 average price per box), which includes the cost of cookies, transportation and storage, and sales materials. The total revenue realized would be approximately $196.875M to be split approximately between the two public firms or $98.4375M per firm.
We calculate COGS and operating margin for Kellogg using the 2012 10K (the last complete year available). In 2012, gross margins ran at 38.3%. We forecast margins to move higher to approximately 40% overall thanks to lower commodity prices and a continuation of low discount rates. As such, Kellogg will receive approximately $39.375M from this year's Girl Scout cookie sales after the Girl Scouts purchase the cookies. The interesting fact is that since SGA doesn't factor in for the Girl Scout cookie sales, with the exception of some sales materials and storage, the margins are higher under this type of contract bakery.
In terms of George Weston Limited, often referred to as Weston or Weston's, a little background is in order. The firm was founded in 1882 and now has 140,000 employees and is 63% held by W. Galen Weston (the original family). It is Canada's largest food processing and distribution company and manufacturer. The company also manufactures and sells Mrs. Fields branded pre-packaged cookies under license. George Weston Limited should earn revenue of $98.4375M (USD) from Girl Scout cookie sales. It must be noted that it is quite difficult to obtain net margins on private label bakery products for George Weston. As such, our estimates on income are conservative at this time. Using Adjusted EBITDA (non-GAAP financial measure) margins of 18.90%, we factor a conservative income derived from the Girl Scout cookie sales in 2014 of $18.60M (USD). According to the company's 2012 annual report, the "Company believes these non-GAAP financial measures provide useful information to both management and investors in measuring the financial performance and financial condition of the company."
In terms of the shares, it should be noted that there is a large short interest position in George Weston and the firm does have debt on their books of $10.71B. There are also many pension and retirement obligations as well. Yet, the company continues to surprise investors with quarterly revenue growth of 2.10% (yoy). The total return, according to Bloomberg, is 13.99% with a dividend yield of 2.043%, and a very low Beta of .314. We consider this attractive for this consumer defensive stock and this sector, as do other street analysts, and forecast earnings to continue growing. Thompson Financial forecasts quarterly earnings growth (yoy) at 46.80%. In terms of share prices, according to Thompson First Call forecasts at Yahoo Finance, the mean target price on the street is $91.50(CAD), with a high target of $99 and a low of $84. As such, we forecast the shares based upon continued earnings growth and possible continued acquisitions and divestitures to have a 12-month target of $94.50 (CAD). In addition, the company has $4.06B in cash on its books at this time. We attribute the share growth to the aggressive stance by management and the current debt/equity structure of the firm.
Investors may purchase the US dollar shares for simplicity's sake and avoid any additional currency fees or charges. Obviously, there will be currency exposure regardless of which shares are purchased. One caveat is that George Weston does not file financial statements with the SEC in the US, most likely due to the costs and burdensome fees or the use of non-GAAP measures as mentioned above. As such, the filings are with the Canadian Securities Administrators" or "CSA" in their SEDAR filing system.
Returning to Kellogg, we forecast earnings thanks to growth worldwide, i.e. China and other developing markets, to continue along with stable commodity prices and low interest rates. We look for earnings to come in line with consensus of approximately $1.06 per share for the quarter. We look at Kellogg as a strong defensive stock with a low Beta (.54 as of January 24, 2014), according to Yahoo Finance, institutional ownership of 80.50%, and a forward dividend yield of 3.0% and an annual return on shares of 3.92% for a total return of approximately 6.92%. The large institutional ownership is attributable to the steady and stable growth and dividend yield. With the continued success of the Girl Scout cookie campaign, we continue to recommend Kellogg as a Buy with a 6-month price target of $70.00 exceeding the previous high of $67.98 set July 22, 2013.
Of the two Girl Scout Cookie manufacturers, our preference as an investment is George Weston. In spite of the lack of ADR shares, we feel it has room for growth in 2014. Its product lines and businesses are diverse and provide investors with an attractive dividend opportunity. Its growth potential in a consumer defensive space with a low beta is unique, and we look at it as a balance to other high beta stocks and low beta utilities with corresponding dividends. This is especially true should the equities market become more volatile.
Overall, we continue to believe the manufacture of Girl Scout cookies is a profitable market opportunity for these two firms and an attractive revenue generator for them in 2014 and beyond. Now, do you think I will be able to order my Shortbread (Trefoils) on an App next year with a direct order routing to the troop of my choice?