Annie’s Organic Food Company’s giant splash on the market last month had many investors jumping for their wallets. The well-recognized brand, known for its organic and affordable foods, as well as its bunny mascot, had the biggest opening day gain for an IPO of this year. With a growing organic consumer market within the U.S. and Annie’s’ recent rapid growth and overall success as a company, many investors feel confident in chasing this cheddar. However, Annie’s’ does have some potential risk factors, and initial success does not always sustain long-term success.
After going public on The New York Stock Exchange on March 28; the company sold 5 million shares at $19 a share. The company, which trades under the ticker symbol BNNY, than nearly doubled its shares to $35.92 a pop. This was a notable 89 percent increase by the end of opening day. The projected range for the company’s share was originally $16-$18 a share.
“This is a really important step for the company,” said John Foraker, Annie’s chief executive. “Organic was considered a niche business 15 years ago, now it’s mainstream.”
The company, which began in 1989, was created by a husband and wife duo; named Annie Withey and Andrew Martin. According to Annies’ website, “the goal of the company was to give families healthy and tasty macaroni and cheese and to show by example that a successful business can also be socially responsible.” The company was originally only known for their macaroni and cheese dinners. The couple began selling the dinners in New England to regional supermarkets and independent natural retailers.
Now, thanks to mostly word-of-mouth marketing, the company has since gone continental; selling over 125 products to an outreach of 25, 000 retail locations in the U.S. and Canada. Annies’ was also ranked as No.1 in the natural and organic market of four product lines, including macaroni, snack crackers, graham crackers, and fruit snacks. According to CEO Foraker, the reason for extending beyond Macaroni and Cheese was because of the feedback the company was getting from consumers.
“Annies’ culture has always been about listening to consumers, on Annie’s first box of Mac-N-Cheese, her home phone number was on the box,” Foraker said. Annies’ food packages may not contain her phone number anymore; however, they still include a letter from Annie. The back of each box contains a personal response from Annie to consumer’s letters. “My hope for Annie’s is that it always remains a purpose driven company.” Withey said. Since going public, Withey only owns 1.1 percent of the company, however, according to the Annie’s website; she still remains the “inspiration” and “corporate conscience” of the company.
A loyal consumer base also gives the brand a competitive advantage. This loyalty may come from Annie’s commitment to social responsibility, as it is also a key ingredient of the company’s culture as well. “Social responsibility is part of a part of Annie’s brand DNA, we’ve always tried to do things different and set an example for the broader world,” Foraker said. Annies’ currently funded programs include Grants for Gardens, Cases for Causes, and Sustainable Agriculture Scholarships. Grants for Gardens offers grants to community, school and other educational gardens that teach children about benefits and foundations of healthy foods. Cases for Causes, provides schools and non-profit organization with free cases of the Annie’s products. And the Sustainable Agriculture Scholarships provide financial assistance to students committed to studying sustainable and organic culture. Financial support from Annie’s is also presented to organizations that encourage organic farming and promotion.
“Companies like Annie’s are important because they really utilize small family farms like ours. Farms that are doing environmentally sound practices that are farming in a way that is good for a land, environment and animals” Organic Valley Farmer, Emily Zweber said. In addition, to this Annies’ foods tap into a rapid growing organic consumer market that are saying when it comes to healthy food ingredients; less is more and Annie’s provides that. “Annies’ products have the least ingredients and ingredients we can typically pronounce…that’s the guts of why we buy.” Annies’ customer Amy Brendmoan said.
In a filing with the Securities and Exchange Commission, Annie’s said that, with sales greater than $40 billion in 2010, U.S. is the world’s largest market for foods labeled organic and natural. The SEC filing also reported the company expects faster demand for organic products than demand for food in general.
"This isn’t a surprise. It is a brand name that everyone knows, and the natural organic food sector is pretty hot right now," said Tiffany Ng, a research analyst at IPO investment advisory firm Renaissance Capital. Annie’s is not only offering a hot ticket item right now, but at an affordable price. Foraker said the company’s products have an average cost of 2.50.
Solera Capital LLC is now a large stakeholder in company, as they currently hold 63.3 percent. On opening day, they sold 3.7 million of the 5 million shares. Solera has pushed Annie’s to include new food categories such as frozen pizza, cheddar cracker snacks and new distribution outlets. As for future plans, according to Foraker, the company intends on maturing the products to appeal to older audiences.
From March 2009 to March 2011, a significant increase occurred in net income of $973 thousand to $20.1 million. According to an article from CNNMoney, Annie’s had a total of $20 million in profit. This was attributed to net sales of $117.6 million, up from $96 million in revenue in 2010 sales and $6 million in profits. Foraker attributes increased sales to a recovering economy, rising consumer confidence, and an affordable organic product. The company currently holds a net income attributable to common shareholders of $596,000.
The company’s mission of making snacks that “moms could feel good about feeding their kids” as well as, buying ingredients from farms, may be another reason for company’s rapid growth. The notable opening day gain for the company is an important indicator of just how “mainstream” the growing audience for organic and healthier food items is becoming.
Annie’s attributes the transformation of organic foods from niche to mainstream, to the increased customer awareness of the development and practice of USDA standards for organic certification. This has increased consumer awareness and confidence of organic products. Organic Foods are currently defined as foods that don’t contain synthetic pesticides, fertilizers, chemicals and synthetic growth hormones. The USDA also requires the certified organic products are made up of 95% organic ingredients. According to Annie’s SEC filing, “75 percent of adults in the U.S. purchased natural or organic foods in 2010, with 33 percent of consumers using organic products at least once a month as compared to 22 percent ten years before.”
Annie’s however, is still considered a high-risk company to invest in. Maintaining and developing a brand of a relatively new company can be a struggle. In addition, Annie’s warns they may not be able to execute their growth strategy. Krispy Kreme Donuts was in a similar boat when their shares initially soared. The popular doughnut company could not maintain the high growth expectation, however, and eventually crashed and burned. Annie’s is also highly dependent on outside sources and conditions. If consumer preference changes, economic conditions decline, or ingredient and packaging costs increase, which could happen as they are considered volatile; sales may decline and shares may drop. In addition, to this, Annie’s has limited annual capital expenditures, equating to only a few million dollars in the upcoming years. “It takes only one bad quarter for the stock to lose 50% of its value overnight.” Stock analyst, Kush Javia said.
Annie’s also does not have the resources to compete in a highly competitive market. This could cause trouble if a wealthier company adopts the same principles and values, as well as, product as Annie’s’ at a cheaper price. Also, Annie’s has limited control over their third-party suppliers and contract manufacturers. Annie’s relies on these third-party suppliers and manufacturers to run.
In addition, while net income has significantly increased in recent years, according to stock analyst, Robert Broans; a $5.7 million tax benefit skewed the bottom line of net profit. Therefore, according to Broans, the SEC filing is not a good projection of future forecasts in earnings. “Assuming a 35% corporate tax rate, the company would have not earned $9.4 million under "normal" tax circumstances,” Broans said.
According to the Consumer Price Index for 2011, there was a 4 percent drop in prices for basic organic chemicals. Organic foods are still notably more expensive and not as readily available for consumers than regular foods. As economic conditions improve however, and organic products become more available within mainstream grocery and mass merchandiser channels, consumer base could expand. Increased demand of a product usually predicts decrease of price, however, only time will tell.
As long as the organic mainstream trend and Annie’s strong likeable brand and loyal customer base continues, Annie’s shares could sustain their success long-term. However, it only takes a few bad sales, to send shares plummeting.
“We of course want to stay focused on delivering great growth and financial success. At the end, of the day (however) it’s that core value proposition that our consumers are reacting too that is the reason we are here today,” Foraker said.