Del Monte Foods Company (DLM)

Del Monte Foods Company is in the business of producing, distributing and marketing of premium quality, branded and private label food and pet products for the U.S. retail market. The company markets its food products under brand names like Del Monte, StarKist, Contadina, and College Inn, while pet food and pet snacks brands include 9Lives, Pup-Peroni, Snausages, and Pounce. The company generates 63% of its revenue from consumer products while the rest comes from pet products.

Pet food is the largest segment of the pet product industry forming 42% of the total market and dog food, cat food and treats are the largest volume categories comprising 40% of the market. Today, about 63% of United States households own a pet. With changing lifestyles, American spending on pets is expected to grow in future. This goes well with the Del Monte, which acquired Meow Mix (Cat Food producer) and Milk-Bone (Dog food producer) and boosted the growth of Pet products segment by 56.6% and thereby made overall top-line growth respectable. But the company has to face stiff competition from well-established players like PetSmart.

Packaged food industry in which the company operates has been impacted by two key trends affecting their retail customers: consolidation and increased competitive pressures. The worst being that the company is being negatively impacted by this trend, which is clearly being reflected in its decline in food products volume. Moreover the margins are coming under pressure due to increased steel, energy, logistics, and other transportation related cost.

Concerns like dismal performance in its major revenue generating consumer products segment and margins being pressurized by inflation, it should better for investors to stay away from Del Monte Foods.