Greenberg: Is Boulder Brands' Gluten-Free Bet Stalling?

A version of this story originally ran May 9 on Herb Greenberg's Reality Check.

SAN DIEGO (TheStreet) -- All you need to know about Boulder Brands  (BDBD) in the wake of its first-quarter results last week is that the growth of its Udi's gluten-free bread as well as the Udi's and Glutino brands combined is tumbling.

Last quarter Udi's grew 37.4%; that's down from 62% a year earlier. And Udi's and Glutino combined grew at 31%, down from 50%.

Margins aren't looking too hot either, with the gross margins sliding to 37.7% from 41.4% in the previous quarter and 42.7% a year ago. The company blames the margin, in part, on the impact of high egg white prices.

Speaking on the earnings call, CFO Christine Sacco said:

Despite higher egg white prices, we expect gross margin to benefit from a number of initiatives. The first is an improvement in our cost of goods, as we are in the process of improving our formulation, which requires less egg whites. This new formulation is in production, and when inventories flow through it will have a meaningful impact in Q3.

Reality: One of the reason's Udi's has done so well is because many consumers prefer its taste to other gluten- free products. Messing with the formulation is almost never a good idea. Just go back and see what happened when McDonalds (MCD), in pursuit of cost-cutting, started changing the recipe of its buns. (Hint: They started to taste terrible and the business suffered.)

And just last quarter, CEO Steve Hughes said, "Egg whites is part of our secret sauce. There are other gluten-free breads that don't have egg whites or have a lower-level of egg whites."

At the same time, the sliding sales growth for Udi's and Glutino suggests that additional competition and the market's limits are eating into growth. Boulder Brands remains red-flagged on the Watch List.

-- Written by Herb Greenberg in San Diego

Follow @herbgreenberg

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. He can be reached at herbonthestreet@thestreet.com.

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