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Boulder Brands Inc (BDBD), The Hain Celestial Group, Inc. (HAIN): The Right Diet Can Be a Matter of Life and Death

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While most of us choose to eat what we like and not necessarily what is good for our health, certain groups of people are less fortunate.

Boulder Brands Inc (NASDAQ:BDBD) is the leading manufacturer of gluten-free food products in the U.S. Its core customers are Americans suffering from celiac disease, with potential complications if they do not maintain a gluten-free diet.
Boulder Brands Inc (NASDAQ:BDBD)

New regulation to deter ‘me-too’ competitors
In August 2013, the U.S. Food and Drug Administration (FDA) came out with a new regulation, providing a standard definition for the term “gluten-free” for voluntary food labeling: The food must contain less than 20 parts per million of gluten. This will go into effect by August 2014.

Prior to the introduction of this regulation, any food manufacturer could label its  products as ‘gluten-free’ without meeting any criteria on gluten concentration. Consumers were not able to separate the real McCoy from the pretenders. With its Glutino and Udi’s products containing less than 10 parts per million of gluten, well below the FDA guidelines, Boulder Brands Inc (NASDAQ:BDBD) should be able to leverage its brand equity to seize more market share.

High margins sustainable
Boulder Brands Inc (NASDAQ:BDBD) delivered high gross margins of 43% for fiscal 2012. In my opinion, the relatively low price sensitivity of Boulder’s customers is the key to this. A study by Dalhousie Medical School also showed that gluten-free products are about 242% more expensive than their gluten-containing counterparts.

First, one in 133 Americans suffer from celiac disease, a genetically linked disease triggered by the consumption of gluten,  according to a study conducted by The Center for Celiac Research. They have no alternative to managing the disease, apart from maintaining a gluten-free diet.

Second, the cost of gluten-free products is relatively insignificant compared to the medical bills associated with not sticking to a gluten-free diet. Patients who suffer from celiac disease and remain untreated could potentially suffer from complications such as osteoporosis, infertility and even a higher risk of intestinal lymphoma and small bowel cancer.

Relative market share advantage
With its gluten-free brands Glutino and Udi’s having a 31.3% market share of the North American gluten-free market, Boulder Brands Inc (NASDAQ:BDBD)’s market share is more than seven times that of its closest dedicated gluten-free competitor. This high relative market share leads to significant cost advantages as a result of economies of scale. Boulder is also able to invest more in marketing and research & development to stay further ahead of its competitors by spreading these fixed costs over greater sales volumes.

Looking ahead
Boulder Brands Inc (NASDAQ:BDBD) grew revenues and organic EBITDA by 46% and 20% year on year respectively in the second quarter of fiscal 2013. In view of this good set of results, it raised the lower end of its full year fiscal 2013 revenue guidance from $450 million to $455 million, implying a 23% increase in the top line year on year.

Boulder is expected to make its international foray in the fourth quarter of 2013 with the introduction of 18 Udi’s products via an unnamed major U.K. retailer. This follows from the acquisition of Davies Bakery, a UK-based gluten-free bakery in May 2013.

In terms of new distribution channels, food service offers the most compelling opportunities for Boulder Brands Inc (NASDAQ:BDBD) As consumers become aware of the concept of gluten-free, more restaurants will be inclined to include gluten-free choices as part of their menus.

Peer comparison
Boulder’s peers include The Hain Celestial Group, Inc. (NASDAQ:HAIN) and Vitamin Shoppe Inc (NYSE:VSI).

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