Summary
- Udi's was great acquisition for Boulder Brands with 2013 sales up more than 45%.
- Foodservice offers great opportunity with 2013 sales tripled and 2014 sales expected to quadruple.
- New partnerships with Papa Murphy's and Smashburger showcase the Udi's opportunity and sets the company up for more growth in foodservice.
A recent buyout of Annie's (NYSE:BNNY) by General Mills (NYSE:GIS) has sparked the gluten free and healthy foods sector, with strong gains seen across the boards. It has also sparked a series of bearish opinions on gluten free being a continued "fad". I believe the biggest area of growth for gluten free, foodservice, is being missed and underestimated by the market. With that being said, I think now is a good time to accumulate shares of Boulder Brands (NASDAQ:BDBD), a natural foods company with two of the largest gluten free players in the sector.
Back in June of 2012, I highlighted the Udi's acquisition from Boulder Brands. At that time I said "The foodservice opportunity is vast for Smart Balance and could really propel the company in the future". Since then Udi's has expanded and is now being recognized by national chains as the supplier for gluten free foodservice products.
According to FoodNavigator, foodservice represented $12 million of the $461 million in sales Boulder Brands posted in 2013. That figure is up from $4 million in 2012. For 2014, the site projects the figure to be $17 million to $35 million for foodservice. The site also projects that "potentially an avalanche coming here" referring to the gluten free foodservice market.
Partners for Boulder Brands in the foodservice sector include: Donatos Pizza, Smashburger, TGI Friday's, and Holiday Inn Express. Donatos is using Udi's in its marketing materials for its gluten free take and bake pizzas, creating free advertising for Udi's and its unique gluten free offerings for both foodservice and consumer products. Smashburger was one of the recentdeals that Boulder Brands signed. Smashburger founder Tom Ryan said, "Udi's is the clear quality leader in the gluten free category."
Adding to that list of foodservice companies using Udi's is Papa Murphy's. The company recently rolled out Udi's gluten free pizza crust in more than 1000 stores, giving its customers another option when selecting their crust. This is the largest deal in place, in terms of units, for the Udi's brand.
Going beyond its announced food partnerships in the foodservice segment, Udi's could get an immediate boost from any other upcoming deals. Investors should also keep in mind that Udi's is working with a large North American coffee chain, whose name hasn't been disclosed yet. The company has also said it has had hot and cold conversations with the big food companies Burger King (NYSE:BKW) and McDonald's (NYSE:MCD). Boulder Brands seems optimistic and says it could be 24 months from now that a major restaurant company enters the mass gluten free market. Imagine if McDonald's or Burger King could offer a gluten free bun to its customers, instead of its rivals.
Consider this quote from the first quarter earnings call:
· "These are major league household names, and I think it is also the tip of the iceberg. We're probably engaged with 10 major food service chains - restaurant chains, across all formats in some level of conversation or development. So as we said, we're hoping, this year, we get 1 major hit on the board. I think we feel pretty good we're going to get 2 major hits on the board, but I think it's just kind of - could open the floodgates in 2015."
That quote comes from Boulder Brands CEO Stephen Hughes regarding the foodservice. Boulder Brands expects Udi's to be a $200 million brand and with the current negotiations going on with restaurant companies it's easy to see how the brand could quickly get there. The unannounced deals could also be catalysts that could send shares higher and gain more analyst coverage for Boulder Brands.
Beyond restaurants, Boulder Brands is also expanding its offerings at universities and sports stadiums. A 2013 article listed the company offering gluten free bread, pizza, hamburger, and hot dog buns. The items at that time were offered at 250 universities and 85 sports stadiums.
Boulder Brands mentioned during its second quarter call that the Udi's brand had four big growth levers:
· Club [like Costco (NASDAQ:COST))
· Foodservice
· Frozen forward (introduction of items like pizza)
· In store baked (expansion of in store bakeries)
Beyond foodservice, Udi's is also working on a new unique and proprietary packaging process. The process involved a new bag that would never be exposed to gluten and would allow customers to bake the pizza in the bag, which never exposes it to a kitchen or oven. Whether this process ever hits the market remains to be seen, but shows how dedicated Udi's is to growing the gluten free market by thinking outside the box, or in this case inside the bag.
Udi's entered the foodservice market in the spring of 2011. At the time of Boulder Brand's acquisition, Udi's had only 2% of its annual sales in the foodservice sector. Boulder Brands highlighted the foodservice opportunity ina presentation of Udi's. The company listed foodservice as one of the key growth opportunities at the time of its acquisition. The company wanted to leverage its foodservice infrastructure to includes other brands like Earth Balance, Smart Balance, and Glutino.
The acquisition of Udi's continues to pay off for Boulder Brands. At the time of the acquisition, Udi's was growing extremely fast. The brand grew more than the next nine dedicated gluten free brands combined in the year prior to the Boulder Brands acquisition.
In the recent second quarter, total sales increased 18.7% for Boulder Brands. Organic growth was 19.4% in the quarter. The quarter was led by the natural business segment, which includes Udi's, Glutino, and the recently acquired Evol. Natural sales were up 34.8% in the second quarter.
Evol saw quarterly sales exceed $10 million for the first time in company history. Glutino and Udi's combined to see sales increase 26.9%. Udi's sales were up 33.7%, with strong gains in distribution influencing sales. The brand was recently launched in the United Kingdom, via deals with Tesco, Asda, and Sainsbury's.
The second quarter continues the strong growth in 2014 that follows up a successful 2013. In fiscal 2013, Udi's had sales of $138.9 million, which was growth of 49%. Udi's had a 46% share of gluten free bread and its top two items outsell the number three item by a 3 to 1 margin. Udi's also had a 45% share in gluten free pizzas with the top two selling items. Muffin and bagel share was also 57%. The company's recent expansion in frozen items saw growth of 23% in 2013.
Boulder Brands continues to trade with a growing multiple. The sector continues to see wide swings based on buyouts and buyout rumors. One natural food company's earnings can also sway the entire sector up or down. One of the biggest risks continues to be whether or not the gluten free market keeps up its high growth or begins to flatline.
MarketsandMarkets estimates the gluten free market to hit $6.2 billion by the year 2018. North America currently has a 59% market share for the entire gluten free market. Bakery/confectionery and snacks represent 46% and 20% of the respective market. These figures bode well for a company like Boulder Brands as its main brands Udi's and Glutino operate in bakery and snacks and have strong market shares in them. The companies have strong share in North America with recent international expansion as well.
Marketing firm Mintel reports that gluten free claims on restaurant menus have grown 200% since 2010. This is a trend I see continuing and as a restaurant manager can attest to being a daily request from customers. Udi's partnerships and success with foodservice will help propel it in the future and hopefully lead to more deals.
Aside from the Udi's brand and foodservice, Boulder Brands has done several recent things that could boost sales and its stock price:
· Opened largest dedicated gluten free facility in the world (Denver, Colorado)
· Started Boulder Brands Investment Group, a small venture capital firm aimed at investments in food companies. Recent investment in pasteurized juice maker Suja.
For the full fiscal year, Boulder Brands expects sales to hit a range of $540 to $550 million. The company expects earnings per share to hit a range of $0.39 to $0.44. Yahoo Finance lists 2014 forecast at $547.6 million and earnings per share of $0.40. In fiscal 2015, Yahoo lists 2015 revenue estimate at $622.8 million, a 14% increase. The 2015 earnings figure listed is $0.57. I think these figures are conservative. While Boulder Brands Smart Balance and Earth Balance see flat sales, the company's gluten free brands are seeing double digit gains that can't be held back. The continued expansion of shelf space, international, and foodservice offer big upside to the shares of Boulder Brands.
I first highlighted Boulder Brands, formerly called Smart Balance, as a top ten stock pick for 2010. Since then shares have more than doubled. Shares of Boulder Brands trade just over $12 at the time of writing. That price put shares towards the low end of their 52 week range ($11.01 to $18.46). The company has a market capitalization of less than $750 million, making it a still relative easy buyout at around $1 billion for a larger food company. While Boulder Brands once saw its stock gains from increased shelf space at large retailers, it should see a boost from its increasing entry into foodservice.
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