Brand investments chill Q3 results at CoolBrands

by FoodBusinessNews.net Staff
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TORONTO — The non-renewal of a license for Weight Watchers Smart Ones frozen snacks as well as declining sales of Atkins Endulge frozen snacks contributed to a net loss of $6,889,000 for CoolBrands Inc. for the third quarter ended May 31. The loss compared with net income of $11,158,000, equal to 20c per share on the common stock, for the same quarter last year. Sales in the quarter were $119,685,000, down 14% from $139,129,000 in the third quarter of fiscal 2004.

"Our financial results for the third quarter continue to reflect the evolving foundation of our business," said David J. Stein, co-chairman and chief executive officer. "The investments we are making in new brands — while adversely affecting our current results — are necessary in order to establish brands that can provide a strong base of recurring revenue, and generate future returns over the long-term.

"Although it is early and success cannot be assured, we are already starting to see positive results from this strategy with No Pudge!, which became our best-selling brand during the third quarter and is currently performing well in most accounts where we have distribution."

Coolbrands attributed the decline in revenues and earnings during the third quarter to the non-renewal of the company’s license for Weight Watchers Smart Ones frozen snacks, which was announced on July 28, 2004, as well as declining sales of Atkins Endulge frozen snacks due to the generally reduced popularity of "low carb" products.

These two brands were CoolBrands’ most profitable product lines a year ago and accounted for 53.3% of total branded frozen dessert sales during last year’s third quarter as compared with 19.5% during the quarter just ended, the company said.

Consistent with its strategy for growth, CoolBrands announced during last year’s fourth quarter that it would implement an aggressive new products introduction program in the frozen snacks segment centered on a new brand license for No Pudge! frozen snacks, as well as licenses for other brands, including Snapple, Crayola, Care Bears and Justice League.

The costs incurred to introduce and support these new brands during the introduction phase contributed meaningfully and materially to the loss for the quarter.

In addition, an exceptionally difficult competitive environment in the U.S. ice cream category adversely affected volume and profit margins on all of the company’s products.

As a result of a previously announced change in the business arrangement with Dreyer's Grand Ice Cream Inc. effective Sept. 1, 2004, CoolBrands began accounting for the distribution of Dreyer's products as an independent distributor, changing from the previously used drayage basis, except for Dreyer's scanned based trading customers which are still delivered on a drayage basis.

As a result of this change, CoolBrands began purchasing products from Dreyer's and selling those products to customers at wholesale, except for Dreyer's scanned based trading customers which are still delivered on a drayage basis.

Gross profit declined to $22,009,000 for the quarter, compared with $32,862,000 for the same quarter last year. Gross profit percentage for third quarter of fiscal 2005 declined to 19% as compared with 25.5% for the third quarter of fiscal 2004. This decline was primarily the result of the impact of lower margins generated by Americana Foods’ manufacturing operations and Eskimo Pie Frozen Distribution’s distribution operations, respectively, and the impact of lower margins generated by CoolBrands Dairy’s yogurt operations acquired in March 2005 as compared with margins generated by the company's historical business.

Due to the decline in revenues and the increases in promotion and advertising expenses in our prepackaged consumer products segment, selling, general and administrative expenses for the quarter increased as a percentage of revenues to 31.3%, compared with 13.4% for third quarter of fiscal 2004.

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