Inventure Foods (NASDAQ:SNAK)
Inventure Foods is not a name you’d recognize at Costco while picking up some frozen berries or at Safeway getting some potato chips for game night. But their portfolio contains brands that you’d probably recognize: Boulder Canyon potato chips, Jamba frozen fruits, TGI Friday’s snacks, Burger King snack packs. They are not the most recognizable brands but they certainly command shelf space at big grocery chains and restaurants.
The Company (then operating as Poore Brothers) became public in 1996, and began reaching astronomical success gradually starting 2008. Without so much as a blink, the Company weathered the financial crisis in 2008 and started gaining momentum at the start of 2009, continuing its upward trajectory until the end of 2014.
What contributed to the Company’s success from 2008 – 2014?
And what contributed to the Company’s downturn in 2015 before picking itself back up at the start of 2016?
Source: Google Finance
First, what you should know about the Company.
Inventure Foods manufactures and markets both “healthy” and “indulgent” snacks under its own brands or licensed brands:
Source: Company Presentation
Over the last two decades, the Company has built national retail distribution channels across leading grocery, natural food store, super stores, convenience and foodservice channels:
Source: Company Presentation
Aligned With Health Food Trend (e.g. The Kale Craze)
Inventure Foods’ portfolio of branded products includes health foods, which they have been pushing to the forefront as the food industry trended toward healthy foods.
Since the turn of the millennium, the food industry has seen a higher growth rate of health and wellness foods than non-health and wellness foods (i.e. in the graph below, green line is higher than the grey line every year):
Source: Euromonitor International
All it takes is Sales Growth and Margin Stability
From 2008 to the end of 2014, Inventure Foods’ stock price experienced a ~600% growth (stock chart below). During this period, the Company reported an overall growth in sales (blue bar graph) and stable profitability margins (gross profit indicated by green line; EBITDA margin by grey line).
Just as the Company was gaining unstoppable momentum, at the turn of 2015, the market proved that a growth in sales doesn’t mean much if the bottom line is not profitable. In Q1 2015, the Company’s cost of goods sold spiked, hurting both the gross profit margin and eventually the bottom line. As a result, Inventure Foods’ stock dipped even though the Company hit record sales. The stock continued to decline throughout 2015 as the margins never recovered to past levels.
Source: Google Finance, Company Filings
2 questions emerge from this observation:
- How did Inventure Foods increase sales between 2008 – 2014?
- Why did the profitability margin fall to negative in Q1 2015? And could they have prevented it?
Important Facts and Major Events… and Oh No’s
To answer the question of what they did right between 2008 – 2014 to command such a notable increase in their valuation during this period as well as what went wrong in 2015, below outlines key events and strategies implemented by Management:
- Acquisition of Radar Farms in 2007 was immediately accretive to sales and earnings growth
- Launched Burger King branded snacks in 2007
- New customers have been targeted domestically, in Canada and overseas where the license has been expanded to include the U.K
- Boulder Canyon Natural snack products grew 27% while snack division sales decreased slightly.
- However, snack division was priced higher which improved profitability.
- Focus on operational execution – plant cost per pound produced was down.
- Focus also on paying down debt.
- One of the plants where their TGI Friday’s branded snack is produced is underutilized due to the snack’s decrease in sales – as a result, looking for private-label and co-packing opportunities. Challenging raw materials cost increase
- Boulder Canyon Natural products leading sales for the Company proved to the Company to implement new strategy for products: to focus on “better-for-you” products going forward
- Capital investment in the facility that produces Boulder Canyon to increase capacity and efficiency
- Proved the product’s success in 2008 and then received BK’s license expansion: Expands the popular Burger King snack products internationally including Latin America and Asia
- Grew the private label products (e.g. rice and bean chips for Trader Joe’s) – strong demand for premium private label products – increased FY2009 revenue by 42%
- Since the CEO change, many presentations at conferences marketing the company to investors
- Boulder Canyon Natural products continuing to contribute to significant sales growth as they expand distribution into more stores
- SG&A increased due to added labor and increased marketing for Boulder Canyon and Jamba All Natural Smoothies – the two of their leading “better-for-you” products
- Stabilized profits for their losing business, TGI Fridays by filling up capacity of the facility via adding private label and co-packing
2011 – 2012 –
- Introduced new lines of health-conscious snacks
- With the troubling TGI Friday snacks, they were able to turn it into a profitable product by improving efficiency in its plant and through successful execution of several large retail programs, growing the product sales 34% in FY2011
- Continued strategy of adding new lines of products in the natural and health categories and launching them at opportune times of the year (e.g. blend-at-home smoothie packs launched at the start of peak summer)
- Sold off lower margin business
- Key investments in facilities to improve capacity and efficiency
2013 – 2014 –
- Started reporting as two reportable segments: Snack and Frozen Foods. Licensing Jamba brand to roll out frozen smoothie snack packs has been overall one of the most successful product implementations. Jumped at the right opportunity at the start of the smoothie fad, partnering with a brand name that is well-known for smoothies
- Just as the Company was receiving accolades as best small company, added to Russell micro cap index, etc, Company runs into a major blimp. And here it is:
- Jan 18: Voluntary recall of Radar Farms smoothie blends due to possible health risk caused by a potential contamination of “Listeria monocytogenes, an organism which can cause serious and sometimes fatal infections in young children, frail or elderly people, and others with weakened immune systems. These recalled blends themselves did not test positive for Listeria monocytogenes. However, Listeria monocytogenes was detected on spinach and/or kale ingredients on another lot which is currently placed on hold. These spinach and kale ingredients used to manufacture the recalled blends were supplied by the same outside party.
Source: Company Website (Modified Pic Obviously)
- Just when they thought the bad streak was over:
- April 23: Their popular Jamba smoothie frozen vegetable and smoothie kits also had the possible health risk from the same bacteria and hence issued a voluntary recall.
- Unfortunately, the health risk was out of their control and could not be mitigated unless they tested every single batch for bacteria, an impossible task.
As I dug deeper into Inventure Foods, a pattern of success factors emerged.
- They were successful at execution of retail programs
- This meant getting into big retailers, marketing to consumers and pricing and margins
- Aligned corporate strategy with industry trend
- Introduced new products that were “healthy”
- Smart partnering with brands that would help promote their strategy
- They were smart in partnering with recognizable brands to help them market their healthy products
- Innovative and Constant Change to Product Portfolio to Capitalize on Products that Work
- They leveraged brands that were popular and introduced aa variety of new flavors and ingredients. One reason they were able to continually introduce new products though was because they had a far reaching retail distribution network, so it wasn’t a problem getting their new products in front of customers.
- They licensed with famous brands and introduced a new line of products.
- Sold off/wrote off products that didn’t work
- Continuous investment and improvement at plant facilities to add capacity and improve efficiency
- Improving efficiency is one thing but their sales/partnership team also went out to find clients that wanted to manufacture their own private-labeled snacks, which was used to cut costs at plants by adding capacity
So far, similarities between Inventure Foods’ success and Crown Crafts’ (kids’ bedding company in my last post) success are striking. The 2 notable similarities are (1) in their respective industries, they both licensed with brands that were popular in their industry at the time; and (2) they constantly used feedback loop to update their portfolio of products. They discontinued products or divisions that were no longer forecasted to have potential growth and they designed, innovated and introduced new products that they found out to have potential in by assessing which existing products were contributing to their growth.
Source: Company Presentation