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A week ago, natural pet food maker Blue Buffalo Pet Products (NASDAQ: BUFF) looked to be headed the way of Pets.com, that ill-fated pet products retailer from the dot-com boom days. Blue Buffalo went public in July but soon after alarmed customers and investors alike when it announced it was recalling some cat treats that contained ingredients that were not FDA approved for pet food, and which could be harmful to cats’ health.
By last Thursday, Blue Buffalo stock was down more than 37% from its $27 per share debut in July. The company was suffering on the public relations as well as the legal front as customers launched class action suits.
But then Blue Buffalo earnings came out, strongly suggesting that for all the troubles this company has had, it still enjoys a large and growing customer base. Blue Buffalo said its third-quarter sales jumped 10% to $259 million, surpassing analyst forecasts. Net income declined 2.3% to $27 million, but this decline was largely due to a massive increase of about 30% in selling, general and administrative expenses, much of which was related to marketing.
The company offered many signals that its business is sound and that it’s expanding into new markets and improving operating margins, all while making progress resolving those lawsuits over the cat food ingredients.
Blue Buffalo stock rose more than 11% after earnings were released.
But, what about the recall, the lawsuits and that matter of some not-so-natural food coming from a so-called natural food producer? Well, from Blue Buffalo earnings numbers, it’s clear that not all customers were alienated. That suggests consumers like its pet food products and that many of them (maybe the dog owners?) are willing to overlook the ingredients debacle.
While the pet food may not be as pure as pet owners had been led to believe, the company says it is committed to offering pet foods rich in antioxidants and devoid of any poultry byproducts or artificial colors or flavors. That’s a lot more than many other pet food makers are doing.
It appears that Blue Buffalo has been given a second chance. Blue Buffalo stock, now selling around $19 a share, remains well below its summertime IPO price. But assuming this is more than a dead cat bounce, it has reversed course. Now it is up to the company to show that it can not only extend its recent sales growth, but that it makes some truly healthy pet food products.
Investors were initially drawn to this company because they recognized the potential of a business that was bringing clean eating to the canine and feline populations. And there’s a lot more value to be found in this business if Blue Buffalo gets it right.
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