B&G Foods is a great short selling case.

B&G Foods (NYSE: BGS) has provided food and condiment options to American consumers since it’s founding in 1889 by two immigrants who began their journey in pickle manufacturing in New York. Since then, it has been acquired, merged, and ultimately gone public as a holding company that offers a wide variety of packaged goods ranging from canned vegetables and sauces to seasonings and shortenings.

As an industry, packaged food is increasingly cutthroat with margins continually being squeezed by commodity markets, manufacturing capacity, and labor shortages in supply chain. Additionally, this space faces highly elastic demand since brands are generally interchangeable, with rare exception, and given the inflationary environment, consumers are more cost conscious than they have been in decades. To top this all off, companies’ ability to upscale production, engineer more efficient processes, and attract more talent with better benefits and pay have been severely hampered by an ever-increasing cost of capital.

With the bleak backdrop of the packaged food space, how does BGS stack up? In many respects, the company is putting in a great deal of effort, but unfortunately, on net, they are falling significantly short both operationally and financially relative to their peers in the S&P 600.

Operations alone can make or break a company, especially in this space. In the last quarter of 2022, BGS achieved a gross profit margin of 20% compared to an average of 27% for its peers. Further, on an operating margin, they hit the average of their peers at 10%. While this may show that they are exceptionally efficient with their OPEX, it highlights the first critical weakness. In essence, to achieve average operating results, they are forced to operate on an exceptionally lean OPEX budget relative to peers to offset the margin they are losing to the commodity markets and negotiations with its customers. As supply chain problems continue to grow in complexity, BGS will need to be agile and have the ability to pivot on a moment’s notice. A workforce that is already stretched to the limit will almost certainly flounder under additional pressure.

To add further operational issues, BGS has had annual CapEx of $22MM compared to depreciation of $97MM for 2022. While this decision may enable the company to produce better free cash flow today, their PP&E will ultimately need to be replaced, repaired, and expanded if they hope to grow. In order to unlock the full potential of their recent acquisition spree, most notably Crisco from Smucker’s, and grow their existing portfolio, they will need to invest in their brands and manufacturing capabilities.

Aside from operating concerns, BGS is also facing significant financial headwinds stemming from debt and dividend commitments. At year end in 2022, BGS had outstanding long-term debt of $2.3 billion resulting in $125MM of interest expense as well as dividend payments of $133MM. The interest and dividends are offset against an EBITDA of $203MM; operating cash flow was so low at $5MM that this isn’t a fair representation of what the company is capable of on a long-term basis. The combination of interest and dividends effectively guarantees they will have to cut the dividend in the near future in order to finance their existing operations and have any chance of growth.

Overall, BGS is a company that is facing uniquely difficult challenges in an already challenging environment. The company’s management has already admitted the value of their brands is under $2 billion, which is less than their outstanding debt. In all likelihood, BGS will hobble along as long as possible, cutting dividends, payroll, production quality, whatever they can, until the weight on their shoulders is too much and they crack. It’s likely too late for shareholders to gain any significant value from their stock, but if BGS restructures now, their debt holders may at least stand a chance.