IPO Look: Annie's, Inc.; Organic Food Goes Public

Based in Berkeley, CA, Annie's, Inc. (BNNY) scheduled a $75 million IPO with a market capitalization of $252 million at a price range mid-point of $15 for Wednesday, March 28, 2012. Managers: Credit Suisse; J.P. Morgan.

BNNY is one of nine IPOs scheduled for the week of March 26. For a summary see our IPO Calendar

BNNY is offering five million shares or 30% of the company in total. Four million shares, 80% of the total shares, are coming from private equity shareholders. IPO proceeds to BNNY are allocated to pay debt and to pay a $1.3 million management termination fee to the private equity sponsor, Solera.

SUMMARY
BNNY is a natural and organic food company with a widely recognized brand, with 24% of net sales going to Target (TGT) and Costco (COST). According to BNNY the company has the #1 natural and organic market position in four product lines: macaroni and cheese, snack crackers, fruit snacks and graham crackers.

Large mainstream conventional packaged foods competitors include Kraft Foods (KFT), General Mills (GIS), Campbell Soup Company (CPB), PepsiCo (PEP), Nestle S.A. and Kellogg (K). Natural and organic packaged foods competitors include The Hain Celestial Group (HAIN), Newman's Own, Inc., Nature's Path Foods, Inc., Clif Bar & Company and Amy's Kitchen.

BNNY's gross margin of 39% is higher HAIN's (28%) or KFT's (35%). And BNNY's trailing 12 months P/E ratio of 20 is the same as KFT's and is 66% of HAIN's

CONCLUSION
Based on the above ratios and gross margin comparisons it seems that BNNY is a buy on the IPO, at the price range mid-point of $15.

BUSINESS
BNNY is growing natural and organic food company with a widely recognized brand, offering consumers great-tasting products in large packaged food categories.

BNNY sells premium products made from high-quality ingredients at affordable prices. Products appeal to health-conscious consumers who seek to avoid artificial flavors, synthetic colors and preservatives that are used in many conventional packaged foods.

BNNY's has the #1 natural and organic market position in four product lines: macaroni and cheese, snack crackers, fruit snacks and graham crackers.

BNNY offers over 125 products and is present in over 25,000 retail locations in the United States and Canada. Over the past three years, the company has significantly increased both the number of retail locations where products can be found and the number of products in individual stores.

BNNY expects that increasing penetration of the mainstream grocery and mass merchandiser channels, combined with greater brand awareness, new product introductions, line extensions and favorable consumer trends, will continue to fuel sales growth in all channels.

We rely on sales to a limited number of distributors and retailers for the substantial majority of our sales, and the loss of one or more significant distributors or retailers may harm our business.

DISTRIBUTION
A substantial majority of sales are generated from a limited number of distributors and retailers. For fiscal 2011, sales to the principal distributor and largest customer, UNFI, represented 28% of net sales, and sales to the top two retailers, Target and Costco, represented an aggregate of 24% of net sales.

Financial results may fluctuate significantly from period to period based on the actions of one or more significant distributors or retailers. For example, in fiscal 2010 sales to Costco were $3.2 million lower than in fiscal 2009, which contributed to lower sales growth.

BNNY does not have commitments or minimum volumes that ensure future sales of products.

SEASONAL
BNNY's business is subject to seasonal fluctuations that may have a disproportionate effect on results of operations. Historically, BNNY has realized a higher portion of net sales, net income and operating cash flows in the second and fourth fiscal quarters (September & March calendar quarters) due to customers' merchandising and promotional activities around the back-to-school and spring seasons.

SALES COMPARISONS
Nine Months Ended December 31, 2011 Compared to Nine Months Ended December 31, 2010:

Products
The revenue increase of $17 million reflects a $9.6 million, $7.5 million and $0.1 million increase in net sales of snacks, meals and dressings, condiments and other, respectively. The increase in snacks was attributed primarily to growth in fruit snacks, granola bars and snack mixes, which generated an estimated increase in net sales of $4.2 million, $2.2 million and $1.8 million, respectively.

The increase in meals was driven by strong growth in the macaroni and cheese product line. Distribution gains also contributed to net sales growth, primarily in the mainstream grocery and mass merchandiser channels.

Channels
Net sales increased an estimated $9.1 million, $6.0 million and $2.2 million for the nine months ended December 31, 2011 in the mass merchandiser, mainstream grocery and natural channels, respectively. The net sales increase was primarily driven by volume combined with slightly higher average selling prices to offset rising commodity costs.

Over the past three years, the percentage of sales made direct to retailers has increased, primarily driven by increased volume with mass merchandisers such as Target and Costco.

Promotions
BNNY offers a variety of sales and promotion incentives to customers and to consumers, such as price discounts, consumer coupons, volume rebates, cooperative marketing programs, slotting fees and in-store displays. BNNY's net sales are periodically influenced by the introduction and discontinuance of sales and promotion incentives.

For example, BNNY had a strong fourth quarter in fiscal 2011, with a net sales increase of 25% over the comparable period in the prior year, aided in part by some significant promotional incentives. Given the substantial fourth quarter BNNY had last year, the company expects its increase in net sales in the fourth quarter of fiscal 2012 will not keep pace with the net sales growth in the prior three quarters.

SUPPLY DISRUPTIONS
In fiscal 2011, organic wheat and sunflower oil were in shorter supply than BNNY expected. BNNY purchases some ingredients offshore, and the availability of such ingredients may be affected by events in other countries, including Colombia, Paraguay, Thailand and Brazil.

In addition, BNNY competes with other food producers in the procurement of organic ingredients, which are often less plentiful in the open market than conventional ingredients. This competition may increase in the future if consumer demand for organic products increases.

COMPETITION
Large mainstream conventional packaged foods competitors include Kraft Foods Inc., General Mills, Inc., Campbell Soup Company, PepsiCo, Inc., Nestle S.A. and Kellogg Company. Natural and organic packaged foods competitors include The Hain Celestial Group, Inc., Newman's Own, Inc., Nature's Path Foods, Inc., Clif Bar & Company and Amy's Kitchen.

In addition to these competitors, in each of their categories they compete with many regional and small, local niche brands. Given limited retailer shelf space and merchandising events, competitors actively support their respective brands with marketing, advertising and promotional spending. In addition, most retailers market similar items under their own private label, which compete for the same shelf space.

EQUITY SPONSOR
Solera Capital pre-IPO owns 90.5%, post IPO expects to own 63.5%, LLC is a private equity firm based in New York City. Solera has invested over $235 million of equity capital in companies in natural and organic food, specialty retail, consumer healthcare, Latin-focused media and green lifestyle.

USE OF PROCEEDS
BNNY expects to net $9.7 million from the IPO at the price range mid-point from selling one million shares. Selling stockholders intend to sell four million shares.

BNNY's intends to use the IPO proceeds to pay a $1.3 million management termination fee to pay Solera, with the balance to repay debt.