The Bunny Keeps Going, and Going, and Going...
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Recently IPO’d Annie’s (NYSE: BNNY) released its fiscal fourth quarter, and its full first quarter results since it went public in March, to much acclaim. Shares hopped by as much as 3% in after-hours trading on the news that the natural and organic food producer/supplier topped analyst estimates on just about every financial metric.
Sales in Q4 of $43 million represented a 17.5% jump from the comparable period last year, and were comfortably above the average analyst estimates of around $40 million. The stronger-than-average quarter (Q4 is largest money quarter) helped boost full year revenues by 20% year-over-year to $141.3 million. Annie’s enjoyed meaningful increases in all three of its product categories:
- Meals: Includes the company’s flagship macaroni and cheese brand as well as canned, pasta, and skillet meals. Category sales increased 23.2% in 2011 to $60.6 million.
- Snacks: Includes Annie’s Cheddar Bunnies and Bunny Graham cracker line, as well as fruit snacks, trail mixes, pretzels, and granola bars. Category sales increased 27.1% in 2011 to $56.8 million.
- Dressings/Condiments: Sales in the category were relatively flat year-over-year, increasing $100,000 to $23.9 million.
Adjusted earnings for the quarter at $0.24/share also beat analyst estimates by 20%, even though gross margins did experience a slight 130 basis point dip in the closing quarter.
The market now has a pretty good picture as to Annie’s financial trajectory. Sales have grown at a robust 16.6% CAGR since 2007 – including three solid years of 20+% sales growth – and a combination of both price increases and volume gains have fueled successful gross margin expansion. 
The particularly exciting characteristic of Annie’s is how many individual levers it has in controlling its future growth. What can investors look into over the mid-term as the corporation continues to grow top line in the mid-to-high teens per year (per company guidance)?
Channel Growth
Annie’s spent a considerable portion of its 23-year history on the shelves in niche health food outlets and other pure play large natural/organic grocery chains like Whole Foods (NASDAQ: WFM). Although natural retailers still comprise around 27% of the corporation’s annual sales, Annie’s has made a significant push into mainstream grocery stores (36% of sales) like Kroger (NYSE: KRO) and southeastern-based Publix and key mass merchandisers (37% of sales) like Target (NYSE: TGT) and Wal-Mart (NYSE: WMT). Annie’s management did spend some time in the year-end conference call highlighting the corporation’s ability to get more preferential treatment in some of the higher volume and more influential retail outlets. Due to the popularity of some of the brand’s core products, Annie’s is beginning to make the shift from purely being placed in tucked-away natural/organic aisles and is being displayed next to national brand leaders in higher traffic grocery aisles. Higher visibility and more brand recognition – especially as consumers try one Annie’s product and move to the company’s other product categories – will be one of the biggest growth drivers going forward.
New Product Launch
The sky is the limit when it comes to the breadth of products Annie’s introduces into its artificial flavor, synthetic color, and preservative free portfolio. The corporation currently has around 125 different products covering the three aforementioned product categories, and did enjoy its first successful launch into the frozen foods category in the most recent quarter. The new “Frannie’s” (Frozen Annie’s) line solely consists of Annie’s organic rising crust pizza product, but it would not be unusual to see the corporation jump into other frozen categories as did its close competitor Kashi – breakfast items like waffles and different pasta and rice-based entrees.
Industry Tailwinds
Underlying the growth in each of these areas is the general increase in awareness and appreciation for healthier diets and lifestyles. Following in tandem with the push for more wholesome diets is the higher volume purchase of natural and organic food products. Annie’s is in a special situation, especially now that the market is expecting significant growth going forward, because general industry growth trends offer a very attractive tailwind in the corporation’s push towards mid-term growth objectives. 
Data Source: Organic Trade Association (no data for non-food sales in 2002)
Total organic market (both food and non-food sales) has been increasing at a very robust 15.4% CAGR over the past decade. Although both sub-markets did experience a significant growth slowdown in 2009, food and non-food sales both did enjoy a ~10% year-over-year revenue increase in 2011. Annie’s will continue to receive a boost from such favorable macro trends – organic and natural consumers are marked by a higher willingness to pay to follow healthier lifestyles (5% of the company’s 20% revenue increase in 2011 was due to price hikes) and the general growth of the industry will attract previously non-organic followers into the market.
There also appears to be a significant growth opportunity in the non-food organic market. At a 22.3% CAGR since 2003, non-food organic sales are increasing at almost twice the pace as the sale of organic food. Although Annie’s does have its work cut out for itself in continuing to get better placement with existing products in retail outlets, a future leap into horizontal product categories (pet food, skin care products, etc.) will allow investors to experience unprecedented growth.
This brings up the question of whether Annie’s is a particularly attractive buy at current market valuations. At $38/share (opening price morning of June 7), the stock sells between 46.3x and 48.7x next year’s earnings of $0.78 - $0.82 per share (per management guidance). This rather enthusiastic valuation is almost twice that of publicly traded organic food producer Hain Celestial, and more than three times the traditionally non-organic yet much more established Kraft Foods (which also offers a 3.1% dividend).
Although Annie’s is a financially sound and swiftly growing player that will enjoy the growth of the organic and natural food markets for the foreseeable future, current valuations do not leave too much margin for error going forward.
gibbstom13 has no positions in the stocks mentioned above. The Motley Fool owns shares of Whole Foods Market. Motley Fool newsletter services recommend Whole Foods Market. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.
