Growth stocks are always a favorite among investors, and Pinnacle Foods Inc. (PF) is one of those. Since its IPO in March 2013, the company has been playing well and its total shareholder return has increased 180%.
Pinnacle Foods posted excellent quarterly results, including a 19.26% increase in net sales. Further, the company's net earnings has increased 8.83% and has declared dividends of 28 cents per share.
Pinnacle Foods is a leading producer, marketer and distributor of high-quality branded food products with 16 manufacturing facilities and more than 5,000 employees. The company's retail distribution channels include grocery/mass, natural and organic, club and dollar and e-commerce. Pinnacle Foods' most recognized brands include Duncan Hines, Vlasic, Wish-Bone, Birds Eye Steamfresh, McKenzie's, Aunt Jemima and Snyder of Berlin. The company's operating segments are:
Birds Eye Frozen.
Duncan Hines Grocery.
Boulder Brands.
Specialty Foods.
Strong third-quarter results
On Oct. 27, 2016, the Parsippany, New Jersey-based company reported its financial results for the third quarter ended Sept. 25. The company's net sales increased 19.26% to $758.82 million, compared to $636.29 million for the comparable prior-year period. Further, North America Retail net sales (comprising of Birds Eye Frozen and Duncan Hines Grocery) increased 0.79% to $558.48 million compared to $554.1 million in the third quarter of 2015.
Gross profit for the reported quarter increased 29.32% to $228.70 million compared to $176.85 million in the prior-year period. Pinnacle Foods' gross profit margin increased 30.14% from 27.79% in the same period last year. Adjusted gross profit for the reported quarter increased 24.24% to $229.08 million, compared to $184.39 million in the prior year period.
The company's operating income increased 39.69% to $110.44 million, compared to $79.06 million in the year-ago quarter. Operating income as a percentage of net sales increased 14.55% from 12.42% in the same period last year. Further, net cash provided by operating activities increased 13.81% to $239.94 million, compared to $210.82 million for the comparable prior-year period.
Net income increased 8.83% to $52.35 million, or 45 cents per diluted share, compared to $48.1 million, or 41 cents per diluted share, for the comparable prior-year period. Net income as a percentage of net sales decreased to 6.9% from 7.56% in the prior-year period. The company's adjusted net income increased 15.17% to $62.8 million, or 53 cents per diluted share, compared to $54.56 million, or 46 cents per diluted share, in the same period last year.
Pinnacle Foods' EBIT increased 20.94% to $118.27 million, compared to $97.79 million for the comparable prior year period. Adjusted EBIT and adjusted EBITDA increased 25.65% to $134.57 million and 23.27% to $161.64 million, compared to $107.1 million and $131.13 million in the year-ago quarter.
The company's cost of sales increased 15.39% to $530.12 million, compared to $459.43 million. On the other hand, cost of sales as a percentage of net sales decreased to 69.86% compared to 72.2% in the prior-year period. Marketing and selling expenses and net interest expense for the reported quarter increased 22.04% to $53.88 million and 63.47% to $36.47 million.
Pinnacle Foods ended the quarter with cash and cash equivalents of $164.93 million, compared to $180.55 million in the year-ago quarter. Inventories increased 24.55% to $502.05 million. Long-term debt for the reported quarter increased 38.94% to $3.14 billion, compared to $2.26 billion for the comparable prior-year period.
Attributes of the quarter
Pinnacle Foods' net sales and gross profit increased primarily due to the acquisition of Boulder Brands. Further, strong productivity and improved mix aided in the growth of gross profit. EBIT increased primarily due to the strong growth in gross profit, partially offset by higher selling, general and administrative expenses due to the inclusion of Boulder Brands.
Segment performance
Metrics
Net Sales
EBIT
Adjusted EBIT
Q3 2016
% change compared to Q3 2015
Q3 2016
% change compared to Q3 2015
Q3 2016
% change compared to Q3 2015
Birds Eye Frozen
$308.94 million
4.12%
$54.19 million
4.31%
$65.02 million
13.47%
Duncan Hines Grocery
$249.54 million
(3.05)%
$48.13 million
8.84%
$47.53 million
(2.50)%
Boulder Brands
$120.93 million
---
$16.08 million
---
$21.33 million
---
Specialty Foods
$79.41 million
(3.38)%
$6.32 million
18.87%
$7.13 million
(12.08)%
Net sales of Duncan Brands and Specialty Foods in the reported quarter decreased primarily due to lower volume and mix. EBIT of the former increased due to strong productivity and items affecting comparability. Further, EBIT of Specialty Foods decreased primarily due to the impacts of the net sales decline and the non-cash tradename impairment charge.
Projections
Pinnacle Foods has updated its guidance for adjusted diluted EPS for 2016 and expects it in the range of $2.13 to $2.15 from the previous guidance range of $2.10 to $2.15. Net sales and adjusted diluted EPS for Boulder Brands are expected in the range of $460 million to $480 million and 8 cents to 9 cents. The company expects its input cost inflation and productivity for the year in the range of 2.0% to 2.5% and 3.5% to 4.0% of cost of products sold. Interest expense and capital expenditures for the full year are expected to be approximately $140 million and $110 million to $120 million.
Pinnacle Foods expects that its net sales will increase by 1% in the next quarter. Further, the company anticipates that its Boulder Brands will add approximately $25 million net sales in Q1 2017.
Growth strategies
Pinnacle Foods is currently focussing on several factors for its future growth. The company is expanding its margin and cash flow by maximizing the value through productivity. It has initiated a holistic company-wide cost reduction program, end-to-end cross functional process, rigorous planning and tracking and improving operational efficiency.
The company is accelerating its profitable top-line growth through strengthening its fundamentals, expanding health and wellness presence and enhancing its channel coverage. Further, Pinnacle Foods is strengthening its operational capabilities by focusing on enhanced planning and supply chain.
Overall, Pinnacle Foods is a rock-solid company with a strong balance sheet, disciplined capital expenditures, strong cash flow generation, history of deleveraging post acquisition and experienced management team.
From 2012 to 2015, Pinnacle Foods' adjusted gross profit margin grew at a CAGR of 2.36%. Further, in the reported quarter, the company's market share for North America Retail expanded 60 basis points compared to the year ago quarter, resulting in the share growth for 10 consecutive quarters. Finally, with the recent quarterly release, the company is aiming for a better future and is set to deliver greater shareholder returns.
Disclosure: I do not hold any position in the company.
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