Greenberg: Red Flags Flying Over Boulder Brands

Editor's Note: This article was originally published at 11:44 a.m. EDT on Real Money on Sept. 25. Sign up for a free trial of Real Money.

NEW YORK ( Real Money) -- Talk about cashing in on fads. Just look at the stock of Boulder Brands ( BDBD), the former Smart Balance, which is the closest to a pure play on the gluten-free gravy train.

Since April its shares have doubled, with a reported sales gain last quarter of 45.6% on sharply higher profit following the company's acquisitive dive into gluten free.

Over the past two years Boulder has gobbled up Udi's and Glutino. Udi's is considered one of the top gluten-free bread brands in the U.S. and Canada-based Glutino has a broader mix of products.

Gluten-free now accounts for slightly less than half of sales at a company once known almost exclusively for its Smart Balance butter-like spreads.

But even with less than half its sales generated by gluten free, make no mistake that on Wall Street, gluten free is the story of Boulder Brands. In a report headlined "Gluten Free Rolls Along," Cannacord analyst Scott Van Winkle wrote, "We continue to believe that Boulder Brands has a favorable financial model and platform for growth in the healthier foods arena that is highlighted by its rising exposure to gluten free."

Gluten free has, without question, been a growth area in food products. Gluten is found in wheat, barley, rye and a few related grains. The only people who must avoid gluten are those with celiac disease, where the long-term effects can be deadly. But in the past few years, almost out of nowhere, gluten free has become synonymous in some circles with a healthy lifestyle.

The food industry -- never one to miss out on a fad -- hopped on board, increasingly slapping "gluten free" on anything that doesn't already contain gluten. The FDA has rolled out gluten-free labeling guidelines. And gluten-free labeled products, once only given their own sections in health food stores, can now be found in conventional grocery stores.

Red Flags Flying

On the surface, the growth looks impressive. But at Boulder Brands a number of red flags fly. Among them:
  • Receivables have grown substantially faster than sales for eight quarters. Last quarter they surged 70% and the quarter before 62%, or nearly double the sales growth. When receivables grow faster than sales, the concern is that customers are being given incentives somehow to take more products than they can sell.
  • Organic sales into grocery stores of all Boulder products, including butter-like spreads, are greater than sales out of the stores. Last quarter, for example, Boulder's organic sales grew by 12%, an uptick from the prior quarter. Yet Nielsen reported sales (or purchases by consumers) at the grocery level increased in the mid-to-low single digits in each of the four-week periods within the quarter (and they have been trending lower). Most of the slide appears to be with the company's butter-like spreads, which have been in decline. Regardless, such discrepancies between sales into and out of the channel can be disconcerting. They can suggest a channel that is stuffed with more goods than can be sold.
  • Perhaps more puzzling and troubling, even as Boulder is rapidly expanding its gluten-free lines through broader distribution into conventional grocery stores and new products, its reported sales growth for both Udi's and Glutino has tumbled in the past two quarters. And not by a small amount, with Glutino slowing to 36% in the second quarter and 34% in the first quarter, down from 62% and 57% in the prior two quarters. The story is similar at Udi's and slowing trends are occurring at the grocery level as well, according to Nielsen.
  • As sales are slowing, inventory at Boulder is ballooning, growing last quarter at a rate more than triple revenue growth. The company attributes the high inventory to several factors, including "efforts to stay ahead of the continued growth and distribution gains in our gluten-free businesses." But too much inventory can be a problem if it doesn't sell through. Not only can it lead to price-cutting and lower margins, but lower future sales if disappointed grocers don't reorder at the same rate.

CFO Christine Sacco dismissed the concerns. "We estimate the fill-out of conventional gluten-free sets will take 12 to 24 months," she said. "We believe growth in the category is estimated to be 15% from a same-store sales perspective." And that's before taking into account "additional growth opportunities in our alternative channels, such as food service, club and the UK," she said.

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