Favorable macro trends in natural and organic food benefitted third-quarter results at Annie’s Inc., as the Berkeley-based company posted stronger returns in its macaroni and cheese, frozen pizza and entree business and snacks segment.
Net income in the quarter ended Dec. 31, 2013, totaled $2,789,000, equal to 16c per share on the common stock, up 99% from $1,401,000, or 8c per share, in the same period a year ago. Net sales increased 27% to $46,177,000 from $36,283,000.
In Annie’s macaroni and cheese business, expanding mainline distribution of the company’s flagship purple box led to exceptional growth during the quarter, the company said. The category also benefitted from strong consumer acceptance of microwavable cups.
“We are well into the trial and repeat cycle for cups, and the results are encouraging,” Ed Aaron, senior vice-president of strategic planning and investor relations, said during a Feb. 10 conference call. “So far, cup sales have been highly incremental to our boxed mac and cheese business, and we are also seeing strong velocity trends on these items. In fact, in conventional retail accounts where we have distribution of cups, our mac and cheese retail sales grew in excess of 30% in the quarter, well outpacing our overall growth. This provides a great fact-based selling story which we expect will lead to further distribution wins in coming months.”
Annie’s frozen business, led by strength in pizza in the natural channel, also contributed during the quarter, as did the company’s snacks business, where volume sales of fruit snacks, crackers, grahams and granola bars all grew at least 20% in the third quarter.
Mr. Aaron said Annie’s is positioning itself to further grow in the snacks segment with more variety and better availability.
“This quarter we will begin the selective roll-out of our new bagged snack packaging for cookies, crackers and snack mix,” he said. “This flexible and resealable packaging is significantly preferred by consumers, provides a better entry price point and offers significant potential for increased mainstream distribution. The team’s execution of this project has been terrific. Following a very successful test last quarter, our full assortment of bag snacks has been accepted by a large national retail customer and will be cut into shelves in all stores in early March.”
John Foraker, co-founder, chief executive officer and director of Annie’s, elaborated on the company’s decision to take the snacks brand in this direction.
“The biggest opportunity for us in snacks is to get to the kind of package that’s got the right shelf selection, assortment and ability for us to drive much deeper distribution in grocery,” Mr. Foraker explained. “In grocery, our snacks business has a very low average s.k.u. (stock-keeping unit) count, just a little over one. All of our business right now is in legacy cardboard boxes, which we have been selling them since we introduced them for the snack business in 2003. We have done a lot of consumer work and tested these products. What moms and parents tell us is that the boxes are fine, but they don’t reseal the way they want, they don’t fit into a purse the way they want or into a diaper bag. They don’t fit into the center console of their car. So the flexible packaging has a lot of consumer benefits.
“The second thing is by moving in this direction we are able to get to an entry price point that lowers the barrier to trial up against the other alternatives that there are in the category. And we are doing that in a way that is favorable to us, or at least not dilutive to our margins on our existing portfolio. So we think it gives us the opportunity to put more items on the shelf, to create an Annie’s brand block in the snack space that has really never existed before.
“And when you walk down the aisle of a well-developed mac and cheese retailer for Annie’s, you can really see the brand block impact, and the impact that we are having on the total category growth and the retailers’ profitability and growth. And we think that we have that opportunity in snacks, too.
“Cheddar Bunnies and Bunny Grahams are really iconic sub-brands, and we have really strong followings for those. But we have very little distribution in mainstream. It’s one of the biggest opportunities that we’ve had in the company. So this gives us the product assortment and the strategy to go after that in a big way.”
Another initiative in place includes expanded distribution of Annie’s granola bar line. Many of the bars were reformulated, while two new gluten-free bars were added to the line in December 2013. Mr. Aaron said the gluten-free bars “are off to a very fast start at retail.”
A significant portion of the conference call was dedicated to commodity costs, and, specifically, wheat. Mr. Aaron said Annie’s has been dealing with high wheat inflation for much of fiscal 2014, and although the company hasn’t seen improvement in cost, it does have better visibility for the next nine months.
“Beyond that it’s a little bit of an open question as to what happens with wheat cost in the back half of next year,” he said.
Mr. Foraker expanded even further on the challenges in wheat buying.
“Historically we have had 10-plus years of being a pretty major buyer in the organic wheat market,” Mr. Foraker said. “There are common relationships to conventional wheat pricing that have historically held really true. On a year-over-year basis right now, conventional wheat costs are down anywhere from 15% to 30%, depending on which type you are talking about. And in that environment we have typically seen wheat costs drop on the organic side with a 6-month to 9-month lag time. This year that really didn’t happen the way it has played out historically, which was a surprise to us. So what we have done in the wheat area is we have gotten creative and very strategic with our partners. We are looking at new geographies, new supply relationships and really expanding our breadth to give us the ability to have a better forward visibility with respect to that commodity. And I think just in general we are getting much more sophisticated with respect to looking forward, planning and setting the expectations right, so that we have a really good forward view of what our margins are going to look like on a more consistent basis.”
