$BUFF $FRPT – YOUR PET IS NOT HUMAN, YOU ARE ANIMAL

POLICY:

Pet food consisting of material from diseased animals or animals which have died otherwise than by slaughter, which is in violation of 402(a)(5) will not ordinarily be actionable, if it is not otherwise in violation of the law. It will be considered fit for animal consumption.

Anything goes (myths as well) in the world of pet fodder, as ordained by the illustrious FDA.

Except Chinese shit.

You may recall, in 2007, an outbreak of sorts. 4,500 furry friends, dead in their tracks. Many thanks to Menu Foods and its Chinese Burrito supplier of wheat gluten and rice-protein concentrate, adulterated with melamine and cyanuric acid, no less. All to save a few pence, surprise surprise. In such matters, dosage is key, and “larger” doses cause trouble. Crystals in urine, kidney damage, death. A tragedy of epic proportions, if you consider the FDA’s reponse. 400 minions mobilized, a 24 hour hotline to manage complaints, subcommittee hearings, inspections galore. Chiptole chompers get less attention.

Here is the best fucking part, per the FDA

If you’re a pet owner wondering what to feed your pets, keep in mind the following: Although many different types of pet food are affected by the recall, the recalled products represent only about one percent of the total pet food available for purchase, according to the Pet Food Institute, the trade association for pet food manufacturers.

“There remains an ample supply of safe cat and dog food available at stores throughout the United States,” says Stephen F. Sundlof, D.V.M., Ph.D., Director of the Food and Drug Administration’s Center for Veterinary Medicine (CVM). “We encourage the public to continue to use pet food that is not subject to the recall.”

ONE FUCKING PERCENT. HELLLLO! ANYBODY HOME?

Seriously, what the fuck? I do understand the notion that food-supply systems for pets and humans might be interconnected, so perhaps this warranted serious attention for tangential reasons.

In fact, this here little scare invoked the US of A to send 33,000 inspectors to Sina, conduct 10,000 insepctions, and shut down 150,000 unlicensed food companies. Meanwhile, its food and drug head was executed for taking bribes. No joke.

Maybe “they” were just looking for an excuse to inspect Burritoville. Or maybe, just maybe, PET PARENTS nee PET GUARDIANS, are a overzealous bunch of animals (not humans) when it comes to their fucking pets, and the damn FDA’s reponse was right in line with their hutzpah regarding the matter of Fido and Puss in Boots.

I don’t fucking know. And frankly, I am not here to speculate on the likely incompetent, CPG-controlled tea-baggers at the FDA and what exactly motivates their vocational pursuits.

What I do know, is that it is patently obvious that humans are animals. So the notion that “humanization” of pets is what is driving this here inane spike in the “super premium” pet food category is misguided. In fact, its the “animal instinct” of mankind, more and more dependent on creatures that are no longer a beast of burden, but a source of companionship for survival. Six of one and half a dozen of the other, you might say. Fine with me.

More importantly, “all’s fair in love and war” and a pet-love affair it is!

Currently, treats are all the rage. In fact, “usage occasions” are being created out of thin air (dental, vitamins). Is your dog pregnant? How about a photo-shoot, a push-gift, and a fucking pre-natal supplement while you’re at it. Pet candles (aromatherapy and fart-redux), vitamin-infused water, custom apparel. These are some of the less egregious items in which a pet-parent might indulge.

You know the story, dear friends. The humanization of pets, the animalization of humans. Two sides of the same coin, perhaps. Alas, I am not here to rank what is and isn’t shockingly bizarre in the world of pet-rearing, either.

I am here to tell you that the pet-food business is driven by melodramatic emotion and abject lack of scientific evidence. In fact, this here musing is likely to incite even the most rationalist of pet-owners, proving my point.

In any case, your stupid “premium pet food” is a veritable Potemkin Village. Even if you are cooking your pet’s every meal or going to the butcher, it is unclear what imbalances, detriments, or benefits come from Alpo versus Marlow and Daughters. The dominant paradigm suggests that CPGs have the budgets to come up with sturdy scientific rationale to hawk their wares. But how can you ignore the bias inherent in Waltham Labs, owned by Mars, the biggest purveyor of pet-vittles in the universe by dollar volume.

Per Bernard Meunier, head at Nestlé of Europe, Middle East and Africa pet care, craft — unlike in beer — will not fragment the industry. He says: “It requires a lot of scientific knowledge, research and development capabilities to develop and market pet food.” And thanks to this “scientific knowledge” . . . we invoke mass-customization once again. White hot, as ever.

Nestlé Purina’s Just Right range lets owners customize recipes, then delivers them with their dog’s name and photo on the bag for individual dogs.

Innovation! Precision! From table scraps to algos! What the fuck? Am I missing something?

Based on the information collected and a proprietary algorithm developed by Purina experts and nutritionists, pet owners will receive a Purina recommendation for a personalised food product. All Just Right by Purina food product formulas meet or exceed the Association of American Feed Control Officials complete and balanced standards.

Sure Bernie, show us the data.

Per data wonk, chiming in, upon hearing of this tomfoolery:

“No one knows your dog as well as you do … so let us sell you this more expensive placebo so you can feel special.”

Snake oil for the pooch. Doesn’t quite get better than this.

Listen here, friends. None of these buggers know what they are doing in this here field of dreams. I’ve seen dogs that eat home cooked meals obese as fuck and blind from diabetic retinopathy. And I’ve heard of dogs “magically” bursting with energy after a switch to Blue Buffalo.

Cornell’s Wakshalg says it best:

Joseph Wakshlag, a nutritionist on the faculty at Cornell University’s College of Veterinary Medicine, recalls becoming aware of Blue Buffalo in 2005 when he worked at a vet’s office in Woodbury, Conn.: “They had salespeople who paid for ‘lunch and learn’ sessions where they talked about the owner’s dog, Blue, who had died of cancer, and now they had a new dog food that prevented cancer. I asked for the data, some evidence. They said, ‘Look, it has blueberries.’ There was no data.” Wakshlag, who since has done paid consulting for Purina, says he doesn’t “think Blue Buffalo is necessarily worse than other brands, but there’s no real evidence it’s any better.” (Bishop speculates that Wakshlag “misinterpreted” the sales pitch. “We have never claimed the product prevents cancer.”)

It is lack of data and scientific evidence with a twist of anthropomorphizery (or reverse), which is unabashedly fueling the “super-premium” category. Anything goes, as long as it mimics the patterns of thyself. And why the fuck not. I’d rather eat animals that don’t eat their own shit and/or diseased carcasses. Wouldn’t you?

For if I eat grass-fed beef, then my dog deserves the same dammit!

But just know that this “humanization” angle ain’t nothin’ new, though industry babble peddles the notion that is the trend du jour.

From a 1981 article:

”Anthropomorphism is the key to the industry,” says Bill Stiritz, a Ralston Purina executive. ”People attribute human traits to their pets.”

Anyhoo, speaking of BLUE BUFFALO, in a few short years, the goons at the helm over there have managed to effectivley double the top-line from $523 million to $1,027 million. Not bad. But to put that into context, Mars and Nestle are doing ~$30 billion per annum. Could this be the Boulder Brands of Pet Food? A stair-stepping revenue story, with all the fixin’s palatable to The Street’s finest. That is, a little “au natural” flair. Supplicants are fawning over it, waiting in line for a secondary offering, obvi. MS and JPM bullish as ever, Wells Fargo and Barclays right behind. Wedbush, the only naysayer at pixel time.

BUFF has been battling an age old issue for retailers, unbridled early growth at the expense of quality. In the case of BUFF, they’ve gone as far as to misrepresent ingredients “unknowingly“. Ultimately, management played dumb and blamed a supplier out of Texas for the ingredient fiasco.

Like many similar names that consumers trust, the company isn’t primarily a pet food manufacturer. It’s a marketing firm with limited control over what goes into the food it wraps its packaging around. Its founder, Bill Bishop, is a career advertising guru who cut copy for a tobacco company before eventually founding the SoBe energy drink empire. When Blue Buffalo announced its April 2007 recalls, it blamed its manufacturer, American Nutrition Inc., and a commodities supplier called Wilbur-Ellis.

The dominant meme is that “production is coming in-house” — that the company is taking charge of quality control etc. In 2014 the company opened its Heartland Pet Food Manufacturing facility, located on 34 acres in Joplin, Missouri. The 416,000 sq. ft. facility includes a dry pet food manufacturing plant and an attached full-service distribution center. Per the 10-k they run a “hybrid network” of owned and contracted manufacturing facilities. It is unclear what percentage of product is churned out “in-house” as opposed to contracted. And uncertain what that will look like after the proposed build out. But don’t worry they are slated to spend roughly $200 million over the next 3 years (per 3/18/16 call) to “expand the manufacturing footprint” and “strengthen research and development”.

Management expects 2016 capex to be $70-80 million, or “1/3 of the total expenditures” through 2018. So the total would actually be $225 million at the midpoint, eclipsing the $200 million that was stated. But no big. Just a $50 million (est) cost over-run over the next few years, $387 million in debt due 2019 (issued to pay a special dividend lol), roughly $800 million in total contractual obligations over the next five years, and a $32 million cash outflow in 2016 related to the Purina drama. Working capital was $286 million in the full year 2015, up from $202 million in 2014 and Net Income dipped to $89.4 million (reflecting charge of $32 million for legal provision) in 2015 from $101 million in 2014. Notably, SGA ramped by 20.7% year over year or $38.9 million. Wow. As a percentage of sales. SGA is up 280bps since 2013. Hmm. Got to blab to sell. Pet Detectives and all.

Mark my words, costs will get out of hand. An operations guru not, Bill Bishop will botch this operation (crystal ball), particularly as the company expands manufacturing facilities. I also suspect this very “on-trend” sashay into the veterinary channel will be a spendy pursuit. They’ve said that the ROI on that spend won’t be seen until 2017. Don’t hold your breath.

As a side note, what the fuck is up with this sales-leasback agreement with the County of Jasper, Missouri (off-balance sheet) for $55 million worth of equipment? So let me get this straight. Jasper issues bonds for $55 million. BUFF buys the bonds. $55 million goes to Jasper. Jasper then uses the $55 mil to buy equipment off of BUFF which then leases the equipment back. Ownership will be transferred to BUFF at the end of the lease term, qualifying it as a capital lease. Why o why? Other than having another $55 million to finance ops. Makes sense since it appears to be a free cash flow negative operation, at heart.

I’m wary of the short side, as CPGs have nothing going for them but Pringles in Africa and Gluten-Free Honey Nut Cheerios. Though debt covenants do state state that the company is barred from “certain types of mergers or consolidations” — whatever the hell that means.

All in all, we’re dealing with consumer psyche. How long can they keep up the ruse of prescription, natural, etc.

Jim Myers, Petco’s chief executive, says his company did not have a single negative quarter throughout the recession. Fewer people traded up to more expensive items during the downturn, but he said they didn’t trade down, either, sticking with a “premium and higher-level range of food products.”

“Our perspective is that, thankfully, we are in a pretty emotional category,” Mr. Myers says.

True dat.

Product quality at risk due to unbridled growth, possible. Operational fuck-job, possible. Levered to gills, for certain.

Consumers turning against it, not yet.

For now, BUFF is “awesome and amazing” — and the “natural” movement isn’t receding anytime soon.

IMO, that wily fool from Artal group which owns 58.6% of the company, is just waiting to pounce on this piece of shit in a fire-sale.

Admittedly, your correspondent’s bark is louder than her bite here.

Risky either way.

JG

ADDITIONAL NOTES:

Customer concentration significant:

Over the last three years, we have diversified our customer base, with 70% of our net sales generated from national pet superstores in 2015 as compared to 75% in 2013. We expect our net sales to accounts outside of national pet superstores to continue to grow faster as we make BLUE more widely available across different specialty channels.

Product Mix:

While we have only one reporting segment, for purposes of discussing our net sales we categorize our products as (1) Dry Foods or (2) Wet Foods, Treats, and Other Products. Dry Foods contributed approximately 81% of our net sales for each of 2015 and 2014, with the remaining 19% attributable to Wet Foods, Treats and Other Products.

Manufacturing:

Our products are manufactured in the United States through a hybrid network of owned and contracted manufacturing facilities and distributed from owned and contracted distribution centers. In September 2014, we commenced manufacturing operations at our Heartland facility in Joplin, Missouri. Our Heartland facility is expected to provide us with the majority of our forecasted dry food production needs over the next several years. We have also commenced plans to expand our internal manufacturing capabilities to provide additional production capacity in the future.

Geographic Mix:

The primary market for our products is the United States, which represented approximately 96% of our net sales for both 2015 and 2014 and 97% in 2013 with the remaining 4% and 3%, respectively, for each of those periods attributable primarily to our operations in Canada, where we also market and sell our products. In 2015, we also had minimal net sales in Mexico and Japan. As part of our growth strategies, we intend to continue to expand our international operations to select markets.

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