Market grows hungrier for CoolBrands

The flavours may be frosty over at CoolBrands International Inc., but the recent market action surrounding this frozen dessert maker has been hot enough to melt several truckloads worth of its Eskimo Pie ice cream treats.

The Financial Post
November 29, 2001

Market grows hungrier for CoolBrands
Hollie Shaw

The flavours may be frosty over at CoolBrands International Inc., but the recent market action surrounding this frozen dessert maker has been hot enough to melt several truckloads worth of its Eskimo Pie ice cream treats.

At yesterday's close of $3.15, shares of the Markham, Ont.-based company (COBa/TSE) are up 304% from their 52-week low of 70¢, and have risen 37% since CoolBrands posted record year-end revenue and profits last week.

After a bumpy 2000, in which CoolBrands exited from unprofitable franchises, saw sales dip during the coolest summer in 100 years and took a $26-million non-cash writedown on bad assets, the company bounced back in its latest fiscal year despite a surge in the price of butter fat.

Revenue for the year ending Aug. 31 rose 82% to $177.6-million, from $97.4-million for the prior year.
Net earnings were $11.1-million, or 24¢ per share, compared with a net loss of $27.8-million (61¢), in fiscal 2000.

The stronger-than-expected performance prompted retail analyst Jamie Spreng of Montreal-based Canaccord Capital to increase his earnings estimates on CoolBrands to 30¢ a share from 27¢ for fiscal
2002.

CoolBrands is optimally poised for ongoing revenue growth of 10% to 12% and double-digit earnings, Mr. Spreng said, because it is ripe to acquire additional product lines and it is just beginning to crack the lucrative convenience store market.

"They also have about $40-million in cash right now and their long-term debt is only $40-million," Mr. Spreng said. "Should they be looking at acquisitions, they will have the cash to finance it. I mean, when you look at what you're buying, that's just under a dollar in cash per share."

A sea change began at CoolBrands three years ago when the company, then known as Yogen Fruz World-Wide Inc., decided to broaden its scope beyond its relatively limited and maturing role as the world's biggest frozen yogurt franchisor and put resources toward a burgeoning consumer products business.

A key corporate strategy involves licensing popular brand names from other consumer products companies and creating a line of frozen juice bars and desserts around it, which it has done with Weight Watchers, Yoplait, Pez, YooHoo, Welch's and Betty Crocker. Its line of Tropicana frozen juice bars, linked to the top-selling orange juice brand in the world, has been a particular success, achieving full distribution in its first European foray this year. Last year, the company bought U.S.-based frozen novelty maker Eskimo Pie Corp. in a deal worth US$35.7-million, more than doubling the size of its consumer products business in the United States.

The Yogen Fruz frozen yogurt chain, which has 5,000 franchised outlets worldwide, accounts for just 2%of the company's business, said David Stein, chief executive.

But despite its recent successes, the company, which has a market capitalization of about $140-million, has yet to pique the interest of many industry experts.

"We've been watching it move, but it's still pretty small potatoes," said one consumer products analyst who did not want to be named. Several U.S. analysts who follow the progress of larger competitors such as Dreyers and Unilever have not heard of CoolBrands.

Mr. Stein is certain that will soon change. The frozen novelty market is worth about US$1.8-billion at grocery stores, but CoolBrands wants to take on the convenience category, as people are more likely to buy frozen juice bars from a corner store when they are out on a hot day. The convenience market for frozen novelties is about US$2-billion a year.

"There is huge potential," Mr. Stein said. In addition, the company "is always looking" at possible acquisitions, he said. CoolBrands also wants to extend the reach of its Weight Watchers bars, which have cracked the top 20 in sales in their category while being available at just 25% of U.S. supermarkets. The brand has not yet been launched in Canada.

In addition, Mr. Spreng noted, the market should be improving because butter fat prices have recovered after soaring from $1.20 a pound to over $2.20 this year. It now trades around the $1.30 level.

Mr. Spreng said it is difficult to evaluate CoolBrands' pricing value as the company has no direct competitors of its size.

To reach a 12-month target price of $4.25, Mr. Spreng chose two Canadian companies with similar market capitalization involved in food processing: Canada Bread Company, Ltd. and High Liner Foods Inc., analyzing enterprise value [market capitalization plus long-term debt less cash] relative to EBITDA.
The two trade at an average multiple of 6.5, while CoolBrands trades closer to 4.

Under a simple price-to-earnings ratio, CoolBrands is trading at about 10 times this year's earnings, while Canada Bread and High Liner average 14.75 times.

Larger food processors such as Dean Foods, Maple Leaf Foods and Saputo trade at about 18 times earnings.

COOLBRANDS INTERNATIONAL INC.:
CEO: Richard E. Smith
Ticker: COBa
Exchange: Toronto Stock Exchange
Head office: 8300 Woodbine Ave. 5th floor, Markham, Ont., L3R 9Y7
Telephone: 905-479-8762
www.yogenfruz.com

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