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Newly-public Sovos Brands Inc. already has a lineup of growing labels in its portfolio, but founder and Chief Executive Todd Lachman says there’s room for more in order to take on large food companies.
“Smaller, on-trend brands are growing at the expense of the larger brands,” he told MarketWatch after Sovos shares began trading.
Sovos
SOVO,
has four brands beneath its umbrella: Michael Angelo’s and Rao’s, both acquired in 2017; Noosa, acquired in 2018; and Birch Benders, acquired in 2020.
Michael Angelo’s is an Italian frozen entrée brand. Rao’s also has frozen entrées along with pasta, pasta and pizza sauce and soup. Noosa is a yogurt brand. And Birch Benders specializes in pancakes, waffles and baking.
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Sovos acknowledges the competitive risk in the food industry in its prospectus, but Lachman is confident that his company is building a healthy stable of brands.
“We look specifically for brands that have taste superiority, strong consumer affinity, higher quality ingredients and a cleaner label,” Lachman said. “These brands are more likely to stick in a household after trial versus other brands.”
Sovos outlined its acquisition strategy in its prospectus, with taste, potential for expansion into new categories, and prospects as a “disrupter” taken into account. The company says it has analyzed more than 200 brands since it was formed. Sovos Brands was incorporated in Delaware on Jan. 17, 2017; the company is based in Louisville, Colo.
And the company doesn’t shy away from premium pricing even as grocery prices are rising.
“The price of Rao’s is significantly less than dinner out for four,” said Lachman. “Even in this type of environment, we’re growing the share of our brands.”
Read: General Mills will raise consumer prices, and McCormick might, too
Rao’s accounted for 55% of the sales for the 12 months to June 21 while Noosa accounted for 24%. The company highlights its reliance on dinner and sauces among the risk factors in its prospectus. That segment, which includes the Rao’s lineup, accounted for about 70% of net sales in fiscal 2020, according to the prospectus.
“We believe that sales of products in our Dinners and Sauces operating segment will continue to constitute a substantial amount of our net sales for the foreseeable future.”
Moreover, a third party owns the Rao’s trademarks for restaurant and bar services.
“We believe that the ‘Rao’s’ trademarks have significant value and are instrumental in our ability to market and sustain demand for our Rao’s product offerings,” the prospectus said. “Any disputes concerning this co-existence agreement may cause us to incur significant litigation costs.”
Sovos merchandise is typically sold in Walmart Inc. WMT and Costco Wholesale Corp. COST, two of its biggest clients representing 13% and 16% of gross sales respectively, Kroger Co. KR, Whole Foods Market, which is an Amazon.com Inc. AMZN brand, and other chains.
See: Amazon says it’s adding a Whole Foods delivery fee to avoid raising prices on merchandise
For the fiscal year ending Dec. 26, 2020, Sovos reported net income of $10.8 million after a loss of $27.1 million the year before. Sales of $560.1 million were up from $388.0 million the year before.
For the first six months of 2021, the company had net income of $10.4 million and sales of $351.2 million.
“Our brands generally over-index with young and family-oriented consumers who have higher disposable incomes,” the company said in its prospectus.
Sovos is an emerging growth company, which means it does not have to make the same disclosures required of bigger public companies. A business remains an emerging growth company until it reaches a number of milestones, including annual revenue of more than $1.07 billion.
Sovos also became a controlled company following the public offering, with private-equity firm Advent owning 64% of the outstanding common stock, or 62%, if the underwriters’ option to purchase additional shares is fully exercised.
Sovos is using the proceeds from the IPO for general corporate purposes and to repay outstanding borrowings from its credit facilities, which, excluding costs, totaled $780 million as of June 26.
Before founding Sovos, Lachman, who is also a director, was operating partner at private-equity firm Altamont Capital Partners from May 2015 to March 2016 and a senior adviser at Advent. Lachman partnered with Advent as well as Sovos chairman William Johnson to create Sovos. Johnson has been an operating partner at Advent since June 2014. Three other directors also hold positions at Advent.
Christopher Hall has been chief financial officer at Sovos since November 2019. Hall has also held positions at Sabra Dipping Company, LLC and PepsiCo
PEP,
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Robert Graves, vice president of strategic initiatives and a board member, is also the owner of Morning Fresh Dairy Farm, LLC, which also regularly purchases and sells Noosa yogurt. Noosa also regularly uses Morning Fresh milk.
Sovos stock has risen to $13.57, up from the IPO price of $12.
The Renaissance IPO ETF has slipped 1% for the year to date while the benchmark S&P 500 index
SPX,
has gained 16.1% for the period.
