Middleby Sees a Slight Sales Growth Slowdown

Kitchen equipment has become an important industry, both for serving the consumer market and for helping restaurants and commercial food operations get the industrial-sized appliances they need. Middleby (NASDAQ: MIDD) has served both markets well, and coming into Wednesday's third-quarter financial report, Middleby investors were hoping that the company could continue to generate the impressive growth in sales and earnings that they've grown used to seeing. Middleby did a reasonably good job of producing revenue and net income boosts, but they weren't able to meet every investors' expectations. Let's look more closely at Middleby's results to see what might be in store for the kitchen specialist going forward.

Image source: Middleby.

Middleby grows fast, but not quite fast enough

Middleby's third-quarter results were impressive by most measures. Revenue was up 28% to $574.2 million, yet as strong as that looks, it was still less than the $600 million consensus forecast among investors following the stock. Middleby saw even better growth on its bottom line, sending net income up by more than half to $75.9 million, and here, earnings of $1.33 per share were enough to outpace the $1.26 per share expectations from most investors.

Looking more closely at Middleby's results, the key thing to remember is that acquisitions were once again responsible for just about all of the company's top-line growth. Organic sales growth was just 1.4% compared to the year-ago figure, and negative currency impacts ate away 1.2 percentage points of that growth.

Middleby's three primary businesses were mixed in their performance. The commercial foodservice saw revenue climb by 14%, but the acquisition of Follett earlier this year was responsible for nearly all of that gain. Organic sales for the segment were up just 0.6%. Similarly, the residential kitchen equipment saw sales nearly double from year-ago levels, but excluding the acquisitions of AGA and Lynx, Middleby's kitchen segment would have suffered about a 5% sales decrease. Only the food processing equipment group saw solid organic sales gains, posting growth of 11%.

Still, Middleby was able to improve its financial efficiency. Gross margin climbed by nearly a full percentage point to 40.4%, especially as Middleby's integration of recent acquisitions continues to move forward.

CEO Selim Bassoul highlighted the factors affecting Middleby's business. "At the commercial foodservice equipment group, continued strong sales increases in the international markets were offset by a decline in sales domestically," Bassoul said, "reflecting slower general market conditions in the U.S. and delayed purchases from several restaurant chains." The CEO also noted that innovative equipment solutions helped the food processing equipment unit at the same time that AGA's sluggishness held back residential kitchen equipment group results.

Can Middleby cook up a better future?

One nice thing that Middleby is starting to see is an end to some of the recall-related problems at its Viking unit. As Bassoul put it, "The continuing residual impact of the prior year product recall at Viking related to products manufactured during the previous ownership ... continued to lessen in the quarter, reflecting increasing traction of the new Viking product launches and benefits from substantial inestments made in quality, customer service, and after-sales service."

Perhaps more important will be Middleby's efforts to squeeze more earnings out of its existing businesses. By using profit improvement initiatives, Middleby might be able to improve its bottom line even without the obvious tactic of making additional acquisitions. With sales growth expected to slow dramatically over the next year, it will be important for the company to find ways to boost productivity if it wants to keep earnings growing anywhere near their recent past growth rates.

Middleby investors didn't react all that strongly to the report, sending the stock down about 1% for the trading day following the release. In the long run, Middleby is in a good position to benefit once some of the headwinds affecting the U.S. restaurant industry wane, but until then, it might be difficult for Middleby to sustain its past pace of growth.

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