3 Reasons To Reconsider Long Position In B&G Foods
Summary
- The resignation of the company’s CFO led to the share price decrease of 7%.
- The decline of the base business may be a sign of the company’s inability to maintain achieved results.
- Amazon’s purchase of Whole Foods turned out to be a disruption to the whole industry.
The discovery of companies in portfolios of big corporations considered to be sideliners and, therefore, not receiving a proper attention to their business is not an easy task. Even when those particular unnoticed “diamonds” are found, it is still important to dedicate enough resources for appropriate marketing campaigns and business optimization schemes to achieve their full rehabilitation. However, with all the steps undertaken correctly and a bit of luck, the acquirer can then greatly benefit by “reaping the harvest.”
This strategy was well applied by B&G Foods, Inc. (NYSE:BGS), especially in 2015 and 2016, which allowed the company to double its size and skyrocket its share price. This year, however, not everything goes smoothly for the company. Notwithstanding the high dividend yield, which is strong compared to the industry average, it may be a good time for investors to reconsider their unwavering belief in the stock, especially taking into account all the challenging external conditions and internal turmoils.
Spring and the beginning of summer of 2017 turned out to be an unfavourable time for the company. To start in chronological order, the first negative sign appeared with the resignation of Thomas P. Crimmins, the CFO of B&G, who was appointed in March 2015. In the press release dedicated to this situation, B&G stressed out that it was a voluntary decision in order “to pursue other opportunities.” Robert C. Cantwell, CEO and President of B&G Foods, said,
On March 15, 2017, Thomas P. Crimmins, our Executive Vice President of Finance and Chief Financial Officer, resigned from our company to pursue other activities” (Source: press release).
He also stated,
Mr. Crimmins’ decision was not the result of any dispute or disagreement with the Company on any matter relating to the Company’s accounting practises or financial statements” (Source: press release).
Taking into consideration that under Thomas P. Crimmins’ control the company has achieved extraordinary results, investors did not find the explanations sufficient. Especially, the wording of the reasoning, to put it mildly, was a bit vague. Many issues even now remain unclear. For example, the decision was adopted on a very short notice, and the last day of Mr. Crimmins as the CFO of the company was on 24th of March, only 9 days after the announcement. Moreover, the company has approved a rather high compensation plan for the ex-CFO. Many people found the plan unfair in case if Mr. Crimmins opted to leave the company without any “external influence.” It did not come as a surprise that the market was not willing to accept these hazy and questionable changes and reacted immediately. After the announcement of the resignation, B&G stock price dropped by approximately 7%.
Another alarming sign for investors came with the publication of the Q1 report in May 2017. While sales showed an increase of 18.4% compared to the first quarter of 2016, the decline in the core business has raised concerns. During the call on 4th of May, Amy J. Chiovari, the company’s Corporate controller and appointed interim Chief Financial Officer, indicated,
Base business net sales decreased 2.4%, or $8.6 million. The decrease was attributable to a decrease in unit volume of $9.8 million, partially offset by an increase in pricing of $0.6 million and a favourable impact of foreign exchange fluctuations on our net sales of approximately $0.6 million. A little more than half or $4.7 million of our overall decline in base business, net sales for the quarter was attributable to Green Giant” (Source: Q1 Earnings Transcript).
However, it is not the first quarter that B&G has showed this negative trend. The decline in net sales related to the core business has been observed throughout the whole year, even though the reasons of this phenomenon were different. While in the beginning of 2016 the decline was attributed to the currency fluctuations, now the main reason is the reduction in volume, which implies much more negative consequences. On the other hand, in order to be objective, the company’s CEO addressed this problem. During the February call, he claimed that the company “plans to stabilize base business in 2017” (Source: press release).
After the release of the Q1 results, the company’s stock dropped by approximately 5%.
(Source: Seeking Alpha)
Finally, the acquisition of Whole Foods (WFM) by Amazon (AMZN), a gigantic online retailer, became a major threat. The whole grocery business now bears the burden. Wal-Mart (WMT), Target (TGT), Costco (COST), and almost every company in the industry experienced a decrease in stock price after the announcement of the deal.
Retail stores should have been expecting something similar to happen. Amazon has already expressed its interest in the industry far before the acquisition of Whole Foods. The introduction of Amazon Fresh service was the first step. Now, when the online retailer has in hand a huge asset of 456 stores and approximately $16 billion in sales (according to Whole Foods Market’s annual report for 2016), the market is punishing grocery industry for its arrogance and lack of strategic vision.
Food companies did not avoid the consequences of the deal, either. Even though the drop in the stock prices was not as sharp as for the retailers, the market is full of concerns that, in order to compete with Amazon, all chains will start lowering prices which will lead to a decrease in the profitability and margins of the food companies.
Summing up, it is yet too early to talk about a bad year for B&G Foods, as many strategic acquisitions the company made back in 2016 still require more time to pay off. However, it is clear that these four months were not the best for the company, and it needs to show better-than-expected results in Q2 in order for its stock to bounce back. The main question is whether the company can achieve this goal in a rather hostile environment.
This article was written by
Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.
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Comments (14)
Sounds like I need to take a stroll through the local Walmart and take a look at the shelf.
Chart looks like strong support at 30.00 which seems to be approaching fast.
We are in agreement on a dividend cut concern, I like BGS products but I own the stock for the dividend.
Long BGS and re examining my position.
Moody's® Rating B3 (03/29/2017)
Standard & Poor's Rating B+ (03/29/2017)
I might play contrarian when BGS prices will be in mid-20 range.
SDS
