2023-04-03 12:18:49 ET
Summary
- Utz Brands, Inc. is on the list of the country's top 10 salty snack makers, with notable brands like Utz, Zapp's, and On The Border.
- Utz Brands catalysts include favorable changes made by the new CEO, a more aggressive pace of portfolio optimization, and the introduction of new profitability enhancement measures.
- Utz Brands, Inc. shares are rated as a Buy, in consideration of the multiple re-rating catalysts in place for the stock.
Elevator Pitch
I award a Buy investment rating to Utz Brands, Inc. ( UTZ ) stock. My bullish view of UTZ is based on the premise that the company's shares have the potential to rise going forward with the realization of a number of key catalysts.
Company Description
Utz Brands, Inc. refers to itself as "a leading U.S. manufacturer of branded salty snacks" in the company's press releases . The company's Utz brand (wide range of salty snacks) accounted for 51% of its Q4 2022 retail sales, as indicated in its fiscal 2022 earnings presentation . In its FY 2022 10-K filing, Utz Brands highlighted that its Utz brand was among the "10 largest salty snack brands in terms of retail sales for the US market. UTZ's On The Border brand (tortilla chips), Zapp's brand (premium potato chips), other brands contributed 18%, 5%, and 26% of its retail sales for the final quarter of last year, respectively.
New CEO
Howard Friedman became the new CEO of Utz Brands toward the end of last year . The former CEO, Dylan Lissette, is now the Executive Chairman of UTZ, and he will gradually move away from the day-to-day running of the company and assume the role of Non-Executive Chairman before the middle of this year. The new CEO appointment could potentially mark a pivotal inflection point for Utz Brands.
The new CEO, Howard Friedman, boasts more than two decades of experience in the consumer packaged goods industry, having worked at Post Holdings, Inc. ( POST ) and The Kraft Heinz Company ( KHC ) previously. Howard Friedman has also been involved in work relating to household brands like KOOL-AID and PHILADELPHIA.
In the company's first (Q4 2022) results briefing since the new CEO appointment held in early-March, Howard Friedman specifically highlighted in UTZ's earnings presentation that there is an "opportunity to increase marketing investments over time to drive consumer demand" and noted the "margin opportunity" for Utz Brands. I think that these are some of the areas where the new CEO can drive changes leveraging on his experience, as I will detail in the subsequent sections of the article.
Powering The Power Brands
UTZ categorizes the company's brands into Power Brands (e.g., Utz, On The Border, and Zapp's) and Foundation Brands. In its FY 2022 10-K filing, the company defines the Power Brands as those offering "higher growth and margins" with "greater potential for value-added innovation." On the other hand, "Foundation Brands" are described as brands providing "cash flow generation to support investment in Power Brands."
The categorization makes sense, considering the varying performance of Power Brands and Foundation Brands. Retail sales of UTZ's Power Brands grew by +15.1% YoY in Q4 2022, while the retail sales growth for the company's Foundation Brands was relatively slower at +9.4% YoY during the same time period.
Howard Friedman noted at the Q4 2022 results call that one can expect "a stepped up level of focus on" key brands within the Power Brands category like Utz, On The Border, and Zapp's. This is consistent with CFO Ajay Kataria's remarks at the earnings briefing that UTZ will continue to execute on its "strategic SKU (Stock Keeping Unit) rationalization activities" which are done to "increase focus on our Power Brands" this year.
In a nutshell, it is reasonable to expect that Howard Friedman might become more active in portfolio optimization by reducing the SKUs for underperforming brands boasting modest growth and weak profitability in a more aggressive manner. This will help to free up excess capital for Utz Brands to reinvest in its key Power Brands to improve the overall revenue mix of the company's product portfolio, which should lead to faster overall top line growth.
Profitability Improvement
As mentioned in the preceding section, UTZ is focused on optimizing the company's product portfolio. In the long run, the proportion of higher margin and faster growing brands should make up a larger and increasing proportion Utz Brands' total revenue. That said, there might be a drag on UTZ's short-term profit margins relating to negative operating leverage, as the company's volume declines in the near term because of SKU rationalization.
Separately, UTZ also has other levers to improve profitability under the leadership of its new CEO Howard Friedman. The company disclosed at its fourth quarter earnings call that it has recently acquired "a new manufacturing location in Kings Mountain" to build a "snack food production facility." This should enable Utz Brands to have a growing percentage of products produced in-house and become less reliant on third party, outsourced manufacturers (that incur higher costs).
Other cost management initiatives that Utz Brands has implemented include consolidating all of its production plants under a single Enterprise Resource Planning set-up, and increasing productivity in various areas such as research, production, and distribution.
Closing Thoughts
Utz Brands, Inc. has guided for a +4%-6% revenue growth and a +6%-10% EBITDA expansion in full-year fiscal 2023. In my view, Utz Brands can achieve even better top line and operating earnings CAGRs in the high single digit percentage and low teens percentage, respectively, in the intermediate to long term. Catalysts like the new CEO appointment, product SKU rationalization, manufacturing capacity expansion and expense optimization initiatives should put Utz Brands, Inc. in a good position to deliver an accelerated pace of growth and superior profitability in the years ahead. This explains my Buy rating for Utz Brands, Inc.
For further details see:
Utz Brands: Multiple Catalysts