Businesses constantly have to decide how to balance the desire for revenue growth with maximizing profitability. Kitchen equipment provider Middleby (NASDAQ: MIDD) has dealt with that balancing act for a long time, and it's become even more important as the company has moved forward with acquisitions to expand its consumer-facing business.
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Coming into Tuesday's first-quarter financial report, Middleby investors wanted to see rising profit on solid sales performance. Although Middleby's revenue growth wasn't as strong as some had expected, good performance on the bottom line promised to help the company continue its forward momentum from 2016. Let's look more closely at Middleby to see what its results tell us about the kitchen equipment company prospects.
Image source: Middleby.
Middleby bakes up a good quarter
Middleby's first-quarter results were reasonably good, even though they didn't live up to all the expectations that investors had. Revenue rose at a roughly 3% pace to $530.3 million, and that was only about half the pace of growth that those following the stock had anticipated. Net income of $70.7 million was up a more substantial 30% from year-ago levels, however, and that produced earnings of $1.24 per share. That figure was well in excess of the consensus forecast for $1.13 per share on the bottom line.
Looking more closely at Middleby's results, the company continued to see weakness in organic sales growth. The food equipment specialist said that acquisitions added nearly $45 million to Middleby's top line, and even after accounting for almost 3 percentage points of downward pressure from adverse foreign currency movements, sales for the company would have fallen by more than 3% without those special factors.
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Moreover, sales were uniformly weak across Middleby's segments when you take acquisitions into account. Only the commercial foodservice division was able to see an increase on its top line, and its 12% boost came entirely from Middleby's acquisition of Follett over the past year. Take that transaction out, and segment sales would have fallen 4%. Meanwhile, the food processing equipment group saw a 2% decline in revenue, while the residential kitchen equipment group took a much harder 11% hit, half of which came from adverse currency movements. Fortunately, margin figures improved, cushioning the blow from weak revenue performance.
CEO Selim Bassoul explained the sluggish performance and put it in perspective. "At the commercial foodservice equipment group," Bassoul said, "sales slowed in comparison to the prior year due to timing of purchases from our major restaurant chain customers." He pointed to similar timing concerns in food processing equipment, and he said that initiatives to become more efficient in the residential kitchen equipment group led to eliminating unprofitable product lines and using less promotional discounting.
Can Middleby heat up?
Middleby expects conditions to improve over the rest of the year. In particular, Bassoul pointed to the consumer side of the business, saying that Middleby is "in the early stages of leveraging our newly developed residential platform, and we believe there remain significant margin expansion opportunities at this segment."
Still, Middleby has had to deal with issues that just won't go away. The purchase of Viking proved ill-timed, as a product recall unrelated to Middleby's management of the company required significant retrenching. The company is still dealing with sales declines because of the reputational damage the recall caused, but consumers have weighed in favorably about product updates and new lines aimed at restoring Middleby's reputation. Moreover, higher-quality products have meant less money going toward warranty costs, and that's helped the bottom line as well.
Nevertheless, Middleby investors weren't entirely comfortable with the sales slowdown, and the stock dropped about 2.5% in pre-market trading on Wednesday morning following the Tuesday night announcement. Even with a temporary setback to its stock, Middleby appears to remain fundamentally strong, and that could help drive future growth once it addresses some of its longtime challenges.
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