Annie's Stock Heats Up on First Day of Trading
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As newly-IPO’d Annie’s (NYSE: BNNY) near 75% opening surge from $19/share to $33/share exemplifies, the organic and natural foods market is a booming business. Founded by two health-conscious food lovers selling natural macaroni and cheese meals in 1989, Annie’s IPO has made it a nine-figure market cap, 50+ P/E (diluted, trailing twelve months), legitimate player in the swiftly growing health foods market.
Through the dual-effort of product portfolio breadth expansion and deeper penetration in national grocers and general merchandise retailers, Annie’s has increased its sales by a near 16% CAGR between 2007 and 2011. Likewise, despite volatile commodity prices placing ever-increasing pressures on food manufacturers and retailers, Annie’s has been able to expand gross margins by more than 800 basis points between 2009 and 2011.
Such a huge improvement, especially during a period of reduced consumer spending on excess (natural/organic foods have less expensive counterparts) and increasing commodity prices, is extremely impressive. The corporation has increased capital expenditures to a robust $2 million - $2.5 million growth level to improve its overall efficiency in the manufacture, transportation, and storage of its food products. Operating margins have naturally followed the gross margin expansion, and have increased dramatically to 12.9% in 2011 from -6% in 2007.
Originating with its core macaroni and cheese product more than twenty years ago, Annie’s has since expanded its total portfolio to over 125 individual items. Three basic categories comprise its total output (years show dates introduced):
- Meals: macaroni and cheese (1989), canned meals (1998), pasta meals (1998), skillet meals (2003)
- Snacks: Cheddar Bunnies (2003, like Goldfish), Bunny Grahams (2005, like Teddy Grahams), fruit snacks (2008), trail mix (2009), pretzels (2010), granola bars (2010)
- Dressings/Condiments: condiments line (2004), dressings line (2005)
The introduction dates are important, as nearly 20% of Annie’s 2011 sales were generated by products released since 2009. The corporation has increased R&D expenditures from a mere $800,000 in 2009 (0.9% of sales) to $2.1 million in 2011(1.8% of sales) to analyze the health food market and health-conscious consumer habits, and developing and test marketing new products. The “win” rate of new products, especially those in the Snacks portfolio released after 2009, shows that the dollars are being well spent and the products are being well-received by end-consumers.
Since its New England-exclusive presence in the late 1980s, Annie’s products have subsequently entered the national market through over 25,000 retail locations. Mainstream groceries, including large names including Kroger (NYSE: KR), Safeway (NYSE: SWY) and Publix represent 38% of the corporation’s sales. Other mass merchandizers including Target (NYSE: TGT) and Wal-Mart (NYSE: WMT) have increased their acceptance of the product, and now represent 30% of the distribution mix.
Most importantly, Annie’s has increased its penetration into the swiftly growing natural retailers space, which includes players like Whole Foods and Trader Joe’s. These retailers, which bolster a huge core following of loyal consumers that are willing to ante up for more health-focused food products, will continue to increase the relevancy of the Annie’s brand name in the fragmented market.
Aside from the aforementioned product portfolio expansion and more shelf space in the nationwide footprint of certain large food retailers, overall growth in the natural foods industry will continue to fuel demand for Annie’s goods. The United States is the world’s largest organic food market, with sales of natural and organic foods exceeding $40 billion in 2010. Between 2000 and 2010, the U.S. natural and organic food market grew at a 12% CAGR, and is expected to grow an additional 8% over 2012.
A return of consumer discretionary income, as well as a deeper understanding of the health benefits of natural/organic foods, will continue to fuel industry growth over the next several years. Nearly 75% of adults in the U.S. purchased natural or organic foods in 2010, and 33% of consumers purchased organic goods at least once a month compared to only 22% in 2000 (Source: Annie’s Form S-1). Especially for those with the ability to purchase slightly higher priced organic foods, the desire to do so is increasing with an overall heightened awareness of health and wellness.
Annie’s IPO success shows that investors are banking on the firm’s ability to use this three-pronged growth approach (products, distribution, awareness) to continue its rapid expansion. Priced at $33/share in intraday trading, the firm is by no means inexpensive at its 55x 2011 earnings valuation. The in-day price movement is up from an already elevated $19/share, as original IPO expectations were supposedly closer to $16/share. Even if the historical double-digit growth patterns continue, Annie’s will still have a very fully-priced (if not more) valuation at the end of 2012.
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