What's Holding Middleby Back?

Middleby (NASDAQ:MIDD) has been a big player in the kitchen equipment industry for a long time. Yet despite moves intended to grow its business and expand more aggressively into the consumer appliance space, Middleby hasn’t been able to make much progress for shareholders since mid-2015. The moves Middleby initiated back then in response to challenging conditions have taken a lot of effort, but the results haven’t been as clear as many would have liked.

Coming into Wednesday’s first-quarter financial report, Middleby investors had wanted to see a big bounce in growth following sluggish performance in recent periods. Middleby didn’t succeed in doing so, and additional challenges lie ahead that could prevent the kitchen equipment specialist from reaching its full potential in the near future.

Metal kitchen equipment with Middleby logo prominently displayed, in a commercial kitchen room.

Image source: Middleby.

A slow beginning to 2018

Middleby’s first-quarter results repeated some of the unattractive trendsinvestors have seen in the past. Sales came in at $584.8 million, and although that was up 10% from year-ago levels, it fell short of the 13% growth rate that those following the stock wanted to see. Net income took another unexpected downturn, falling more than 7% to $65.4 million, and the resulting earnings of $1.18 per share didn’t come close to matching the consensus forecast for $1.40 per share on the bottom line.

Things would have been even worse if it hadn’t been for some extraordinary upward impacts on revenue. Acquisitions represented 12 percentage points of growth, without which Middleby would have seen top-line declines. Foreign exchange added another 2.8 percentage points of growth, and a change in accounting rules gave a similar-sized boost to Middleby’s sales performance. All told, sales would have fallen 7.2% without the combination of those favorable factors.

Just about all of Middleby’s segments felt the pinch during the quarter. Commercial foodservice equipment saw a 15% sales boost, but organic currency-adjusted sales were down 1.4% from the year-ago period. In the residential kitchen equipment unit, organic sales dropped 8.4% on a currency-adjusted basis, as a 5% rise in sales at the beleaguered Viking unit provided one of the only glimmers of hope for the division. Food process equipment sales would have fallen 8.5% without taking acquisitions into account, and absent new accounting rules, the segment would have seen an even more precipitous decline of nearly 29% on its top line.

Acquisitions also weighed on margin figures. Gross margin fell more than three percentage points as unfavorable sales mixes and lower volumes also contributed to the company’s woes.

Can Middleby recover?

CEO Selim Bassoul tried to show that there’s a light at the end of the tunnel for Middleby. “Although this initiative has been disruptive in the short term,” Bassoul said, referring to company efforts to let sales reps carry all of Middleby’s best brands and product innovations, “it has resulted in a stronger, more aligned selling organization and greatly simplified the sales process for our customers.” The CEO believes that a combination of improvements will pay off in the long run and were worth the investment.

Middleby pointed to several things that could keep the company moving forward. The innovations it has built into its product line in recent years have finally started to gain traction from Middleby’s customer base, and orders that the company has already gotten should turn into realized sales within the next few quarters. Greater use of automation will be prominently featured in kitchen equipment going forward, and recent acquisitions have aimed to further develop Middleby’s capabilities to offer that technology to customers.

Yet two adverse events stood out as potentially having a lasting negative impact. First, several anticipated orders for food processing equipment didn’t materialize, and Middleby said the repercussions will be felt for upcoming quarters as well. Secondly, premium-brand consolidation will probably take another quarter to complete, making the second quarter a tough one for the residential group.

Middleby investors weren’t happy about the report, and the stock plunged 15% at the open in morning trading after the announcement. Without more concrete signs of progress, Middleby will probably have to deal with skeptical shareholders for the time being.

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