Organic wheat prices weigh on Annie’s bottom line

by Eric Schroeder
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BERKELEY, CALIF. — Although it was able to turn in record sales and earnings during fiscal 2014, bottom-line results fell short of expectations at natural and organic foods maker Annie’s. One of the main culprits: organic wheat.

“Whereas conventional wheat prices declined in our fiscal year, we experienced organic wheat inflation in the teens, significantly higher than we originally expected,” John Foraker, co-founder, chief executive officer and director of Annie’s, explained to analysts during a May 29 conference call. “The issue was most pronounced in the fourth quarter, with organic wheat inflation moving even higher to approximately 20%. As organic wheat is our largest input, accounting for roughly 20% of our total commodities spent, the financial impact was significant. We admittedly did not do a good job anticipating the severity of this dislocation, but we’ve learned a lot from the experience, and we have taken decisive steps to be more strategic and disciplined in our sourcing efforts.”

Mr. Foraker said Annie’s has been expanding its base of supply, deepening relationships at the farmer level and increasing forward cost coverage to provide improved visibility into the company’s supply and cost of organic wheat. But, the company still expects further upward price pressure in organic wheat, dairy and other commodities in fiscal 2015. To address the rising costs, he said Annie’s plans to implement appropriate price increases, which would be in line with increases the company took prior to fiscal 2014 to help offset higher costs.

Elaborating further on the organic wheat market, Mr. Foraker pointed to a growing demand for the commodity.

“It’s clearly not just one new competitor coming in,” he said. “There’s a lot of organic bread brands that are growing and expanding nationally. There’s just generally been a significant increase in the demand for organic wheat and in the very short term, the supply hasn’t reacted as fast as it needs to.

“We didn’t leave ourselves in a good position as we called out on that last conference call, and as prices accelerated through the quarter, it had a bigger impact on us. And another factor that caught us a little by surprise is we saw higher organic wheat inflation coming to us through our quarterly co-packer reconciliations, which is a process issue which we have really focused on fixing, which will give us better visibility in the future.”

To better position itself, Mr. Foraker said Annie’s is focused on “getting longer, out ahead, more volume locked up with defined price.”

Net income at Annie’s in the year ended March 31 was $15,289,000, equal to 90c per share on the common stock, up 36% from $11,252,000, or 66c per share, in fiscal 2013. Sales increased 20% to $204,104,000 from $169,472,000.

For the fourth quarter ended March 31, net income was $5,128,000, or 30c per share, up 33% from $3,865,000, or 22c per share, in the same period a year ago. Net sales totaled $60,057,000, up from $52,092,000.
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