- B&G Foods has struggled this year as the company has failed to integrate its acquisitions properly.
- B&G might continue struggling due to the presence of stiff competition in the form of General Mills and TreeHouse Foods.
- B&G's fundamentals look weak, and this is another reason to stay away from the stock.
B&G Foods (NYSE:BGS) has disappointed investors in 2014. The stock has underperformed the market so far in 2014, losing almost 15% of its value. It doesn't look like B&G will recover any time soon, as the company's second-quarter revenue fell short of analysts' expectations. The company also lowered its full-year outlook.
Despite making a string of acquisitions in recent times to bolster its business, B&G's performance on the stock market has left a lot to be desired. Moreover, the company is in direct competition with bigger peers such as TreeHouse Foods (NYSE:THS) and General Mills (NYSE:GIS). In such circumstances, will B&G Foods be able to make a comeback?
Trouble with acquisitions
Acquisitions are driving B&G Foods' growth. It reported a strong year-over-year jump of 26% in revenue in the previous quarter to $203 million, but Wall Street was expecting $207 million. Additionally, B&G's gross profit margin dropped 3.5 percentage points from the prior-year period due to higher sales of low-margin products.
It looks like the company hasn't been able to integrate its acquisitions efficiently into the business. B&G Foods has made four acquisitions since May 2013, and it seems that the company ate more than it can chew. According to CEO David Wenner, "We have stressed our systems in a variety of ways, the impact of which we underestimated when we did those acquisitions."
Another reason behind B&G's poor performance was weakness in its shelf-stable food business in the U.S. The company's Cream of Wheat brand declined more than 20% sequentially. In fact, this segment has posed a challenge for the entire food industry for a few years now. But, the good thing is that in spite of a challenging environment, B&G managed to post marginal growth in overall volumes in this segment. This is encouraging, as it sets the tone for a recovery going forward.
B&G's troubles do not end here. It experienced inefficiencies in its operations during the second quarter, and this led it to lower its outlook. The company had to incur higher-than-expected warehousing and distribution costs due to factors such as space constraints. B&G is finding it difficult to shift light snack products as well, leading to inefficient distribution.
Trying to get better
The company, however, is taking steps to address these issues. B&G has already shifted one of its three major warehouses to a larger facility. The second warehouse will also be shifted shortly, while the third one is adequately equipped to serve its needs.
B&G has also lined up various new products for the second half of the year. These include Ortega Fiesta Flats, Ortega Taco Kit, and three new Cream of Wheat products. It is also expanding the Crock-Pot line. Management believes that these new varieties will help the company boost its numbers. Additionally, the company will focus on targeted promotional activity to spur sales of these new products.
As mentioned earlier, B&G has made four acquisitions in the past year. These include TrueNorth, Pirate brands, Rickland Orchards, and Specialty Brands, and all of them have performed differently. Some of its snacks brands, such as New York Style, Old London brands, Pirate's Booty Crunchy Treasures are doing well. But, Rickland Orchards is facing a tough time with its distribution channels. B&G, however, is working on new offerings and concepts to reignite Rickland Orchards' lost momentum.
The competition is strong
The competition in the packaged-foods industry is getting stronger. The presence of established players such as General Mills and TreeHouse Foods will make the going difficult for B&G. Both these companies are aggressively expanding their product portfolios. For example, General Mills' Yoplait Greek yogurt brand is in direct competition with B&G's Rickland Orchards.
General Mills management is of the opinion that the company has gained market share in the Greek yogurt business. Its family-focused snacking campaign and an improved distribution mechanism are leading to strong growth in the yogurt segment. Another thing that will work in General Mills' favor is its strong cash position of $867 million. In comparison, B&G has just $17 million in cash. So, General Mills can use its cash pile in promotions to outmuscle B&G in the Greek yogurt segment.
Another company that poses a potent threat to B&G is TreeHouse, which has acquired six companies in the last four years. In April, TreeHouse announced that it is acquiring Protenergy Natural Foods, which deals in soups, broths, and gravies. As a result, B&G's Bear Creek brand, which is its largest and sells dry soup mixes and side dishes, might come under pressure.
TreeHouse intends to use Protenergy to bolster its private-label soup offerings and gain access to household pantries. It is changing packaging of the soups from steel cans to re-sealable cartons, and it will also be introducing tetra packs. These consumer-friendly initiatives will allow TreeHouse to improve the penetration of the Protenergy brand into more households.
B&G Foods is facing an uphill task. Although the company's top line is growing on the back of acquisitions, its gross margin is declining. The company also has a debt-to-equity ratio of 2.78, which is higher than both TreeHouse and General Mills' debt-to-equity ratios of 0.69 and 1.34, respectively.
As such, it would be wise for investors to stay away from B&G Foods for the time being and instead look at other options in the packaged-foods space.