Greenberg: Competition Heats up for Boulder Brands

NEW YORK ( TheStreet) - Post-quarter Update: Red flags continue to fly over gluten-free pure-play Boulder Brands ( BDBD), even as analysts -- in their post-quarter reports (surprise, surprise) -- glossed over what to me would appear to be obvious concerns.

My original piece on the company raised a number of concerns, including receivables and inventory rising much faster than sales.

The trend continued in the third quarter, as gross margins continued their multi-quarter slide.

But there's so much more at the company, whose brands include Udi's, Glutino and Smart Balance.

Among the items that caught my eye:

Celiac Awareness Month -- Or Not?: Let's start with CFO Christine Sacco's comment on the earnings call that "we saw some pull-forward for Udi's sales ahead of October Celiac Awareness Month..." Never mind that May has replaced October as Celiac Awareness Month or that an annual event like that should already be factored into planning. (Celiacs cannot eat gluten.) Analysts, unconcerned about the impact of stealing from one quarter to help another, estimate it's about $5 million, or (a drumroll!) the amount of the quarter's revenue beat.

Sacco, in an email response to my query, said that Celiac month "runs in May and October." She added that "Udi's had pull forward as promotions related to the event drove sales to 74% for the quarter (vs. 50% consumption)."

Supply Shortages: The company also talks about sales getting hurt by "near-term supply shortages," thanks to "robust growth rates." CEO Stephen Hughes referred to it as a "high class problem" but didn't say on the call what, specifically, is in short supply. In her email to me, Sacco elaborated: "In fulfilling such a high rate of demand in Q3 we were forced to decrease our inventories on products that are produced on what we internally refer to as our bun line where a variety of GF products are produced."

Competition: Then there's the issue of competition. Grupo Bimbo's Goodbye Gluten brand is making headways. Hughes, who early in the call said that Udi's "consumption" was up 49%, insists Goodbye Gluten isn't taking a toll. "We have been tracking them very closely, obviously," he said on the call, "and what's interesting is...in the markets where Goodbye Gluten has been selling, Udi's bread is up 33% in those markets. In the markets without Goodbye Gluten we're up 33%."

(You would think Udi's would be high more in markets in which there is no Goodbye Gluten, especially when Udi's overall gain for the quarter was up 49%. But I digress...)

Hughes added: "I kind of liken this to a swimming pool -- we are standing on one side with our garden hose trying to fill it, and you've got General Mills on the other side trying to do their baking mixes and refrigerated dough, and then you have Goodbye Gluten. But I think the consumer demand is so underserved that it will be a long time before we begin to fill that pool up and begin to interact there."

That assumes that the non-celiac population, which is a small percent of the population, will flock to gluten-free products. Either way, as competition heats up, so does the risk of pricing pressure. Hughes downplays the impact, saying, "We're seeing some people trying to come in with lower prices, and it baffles us how they're getting to those prices because we know the supply chain implications."

He adds, "You're going to see some people doing price-competitive things. We haven't really seen that as anything that is having a share impact on us."

Reality: Boulder Brands is no different than any company that is rapidly expanding its doors or stores. As long as they can keep expanding they can keep the growth story -- or perception of a sustainable growth story -- alive.

Add to that, in this case, the company's continued comments that it's expanding into "food service" and you get a story that looks like it has legs. (As an aside: Whenever I hear "food service" as a growth area from a food company I always think of Gardenburger, a one-time high-flyer, whose success with "meatless" burgers in the grocery aisle made it the vegetarian option at many restaurants. Still, its stock flamed out and the company filed for bankruptcy. Not only was it overloaded with too much debt for its growth to service, but competition from the likes of Boca Burger ate into its first-mover advantage.)

I'm not suggesting Boulder Brands faces the same fate. What I am saying is that it's making a big push into grocery and food service on the back of what may be a fad for all but those who need to eat gluten-free.

The good news, for celiacs, is that, thanks to Boulder Brands and its competitors, there are plenty more options than there were a few years ago. That means, ultimately, lower prices on staples like gluten-free bread, which have always commanded a hefty premium.

The bad news, for investors, is that there are more options, which translates into more competition. Where I come from, the more competition -- especially for products that beyond the possibility of a fad may have limited growth potential -- the tougher the business often gets.

-- Written by Herb Greenberg

Herb Greenberg, editor of Herb Greenberg's Reality Check, is a contributor to CNBC. He does not own shares, short or trade shares in an individual corporate security.

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