Patties caught in the crossfire

Patties Foods, the market leader in the savoury and fruit pie categories, is in the front lines of the battle waging through the supermarket channel over private- label branding and a shift by consumers away from well-known labels to supermarket-own offerings.
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Patties actually straddles both sides of the battle, with a private-label business that makes foods for contracted grocery clients while also owning some of the most popular brands in the frozen foods aisle such as Patties, Four’n Twenty, Herbert Adams and Nanna’s. The food producer also has a growing business catering to hungry travellers who pull into their local service station or convenience store eager for a quick hot snack.

But it is feeling the pain from the supermarkets as they screw down ­suppliers and also devote more space to private-label brands.

Patties Foods flat first-half fiscal 2014 result showed net profit down 3.3 per cent to $8.8 million, while underlying profit (ignoring abnormals) was down 7.5 per cent. The company did its best to keep costs in check but did open the purse strings to pump up marketing spend to support its key food brands.

Revenue for the first half was only marginally up to $126.5 million, which was impacted by the loss of a private-­label contract. It has forecast flat earnings for the second half of fiscal 2014.

Morningstar analyst Daniel Mueller noted the weakness of the second half forecast given a packaging automation project commissioned during the half which is expected to deliver full benefits in the second half.

He said Patties had flagged a number of initiatives for the second half, including new product launches, price increases and cost controls.

”This makes the flat second half outlook particularly perplexing.”

Morningstar has lowered its fiscal 2014 and 2015 NPAT forecasts by 6.9 per cent and 6.7 per cent respectively and now expects fiscal 2014 to be down on the previous year.

”While the company has maintained revenue growth, this has been achieved to the detriment of margins and we reduce our long-term margin forecasts. Our fair value estimate decreases from $1.40 to $1.30, with the shares currently around fair value.”

Shares in Patties have fallen 18.5 per cent in the past 12 months.

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