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B&G Foods Struggles With Input Costs, Pricing Likely to Aid

Zacks Equity Research

B&G Foods, Inc. BGS looks dull on headwinds like adverse divestiture impacts and high input costs. The stock lost nearly 17.3% in the past three months compared with the industry’s growth of 9.2%. Nevertheless, the company has managed to stay afloat on the back of prudent acquisitions and pricing gains.

Factors Aiding the Company

B&G Foods actively pursues strategic acquisitions to boost growth. The company has acquired notable brands such as Back to Nature, Green Giants, Victoria, Mama Mary and Specialty Brands. Markedly, Green Giants has emerged as one of the leading brands of the company and has been delivering sales growth in the trailing nine quarters. In the second quarter of 2019, net sales from Green Giant products (including Le Sueur) grew 7.9%, courtesy of increased sales of frozen and shelf-stable products.

Moving on, strategic pricing initiatives have played an important role to boost revenues and drive profitability for a while. During the second quarter, the company’s net sales gained $4 million from net pricing efforts. Management continues to expect pricing initiatives to be a strong driver in 2019, which fueled sales by $15-$20 million.

The company is also on track with cost-reduction initiatives. Such efforts are likely to deliver gains worth $20-$25 million in 2020. It is on track with its inventory reduction plans. The company successfully reduced inventory to nearly $404.8 million at the end of second-quarter 2019 compared with $446.3 million in the prior-year quarter.

Can Efforts Remove Hurdles?

The Pirates Brands’ divestiture to Hershey HSY continued to negatively impact B&G Foods’ top line when it reported second-quarter 2019 results. This marked the company’s third consecutive quarter of sales decline. Moreover, the sale of Pirate Brands is expected to continue to affect results in the third and fourth quarters of 2019.    

B&G Foods is persistently being affected by rising logistics expenses, as witnessed in the second quarter. Adjusted gross margin was down 10 basis points (bps) year over year in the said quarter due to higher input costs stemming from freight, warehouse and procurement expenses. Inventory-reduction initiatives and unfavorable mix also caused the downside. Input cost inflation is likely to persist in 2019 and exert pressure on margins. Other food company’s such as General Mills GIS and Lamb Weston LW are also bearing the brunt of rising input costs, especially those related to transportation.

Nevertheless, efficient pricing and ongoing cost-saving efforts are expected to help the company mitigate input cost inflation in 2019. Further, we expect that strong brands will keep supporting this Zacks Rank #3 (Hold) company’s performance. Such upsides are likely to aid the stock in making a comeback to investors’ good books.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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