Organic To Go: Breaking The Fast Food Stigma

By Will Ashworth | June 05, 2008 AAA

Most people today have little time to prepare quality, nutritious food, resorting to fast food fixes at lunch and dinnertime. The result is an abundance of overweight Americans. We've heard all the statistics so I won't bore you with them. However, I will tell you about a company in Seattle that is working to be a part of the solution. It's Organic To Go (OTCBB:OTGO), and it's spreading its vision for healthy eating across this country. Only time will tell if it's successful, but the company is off to a good start.

Four Major Cities and Counting
Organic To Go, America's first certified organic fast casual restaurant has gone from an idea to 26 company-owned retail cafes along the West Coast including San Diego, Los Angeles and Seattle in just 36 months. In addition to the cafes, it has 120 branded Grab-N-Go locations, provides catering at 14 universities as well as LAX, one of the busiest airports in the country, and delivery services to corporations in those markets. By building a multi-channel distribution system in major metropolitan markets, it could become the Starbucks (Nasdaq:SBUX) of fast casual organics.

Just days ago it announced its expansion into a fourth market, Washington D.C., with the acquisition of four High Noon cafes. The business currently generates $6 million in annual sales. CEO Jason Brown indicated it would operate the Washington business in the same fashion it has the other three markets, producing quality food from a central commissary and then pushing that out to the cafes, delivery/catering and wholesale businesses, producing long-term growth.

The purchase of the four cafes in Washington was its eighth acquisition since 2005. Some of the posters at well-known sustainability blog Treehugger feel this expansion has led to overpriced food, wasteful packaging, and a poor tasting product. Time will tell if America agrees. (For more on acquisitions, be sure to check out Analyzing An Acquisition Announcement.)

Other Healthy Alternatives
Health Magazine recently examined 43 restaurant chains looking for the healthiest choices for dining out. They were able to come up with some interesting selections including Uno's Chicago Grill, Bob Evans (Nasdaq:BOBE) and PF Chang's China Bistro (Nasdaq:PFCB). While healthy alternatives exist at the fast food chains, it's still very much a case of picking and choosing. If you're not careful about what you're ordering, you could be over your daily caloric intake in just one meal.

More than a Marketing Gimmick?
According to the National Restaurant Association, three-quarters of the people who answered their survey about eating habits said they were trying to eat healthier foods. People at work want better options for lunch and Organic To Go is positioning itself to meet this demand. Fast Casual magazine (that's right - there is a Fast Casual magazine) believes the sale of nutritious food is just starting to take off. Organic To Go is on the ground floor of something big.

Andrew Freeman, a well-known hospitality consultant lists organic foods in no less than three restaurant trends for 2008. While some feel organic means expensive, which translates into slow sales during uncertain economic conditions, these choices indicate to me that the move to better quality foods is here to stay.

Profits Coming Soon
Organic To Go plans to be EBITDA positive in 2008. Given that the EBITDA loss in 2007 was $7.5 million, it's going to be a tough challenge. However, in Q1 2008 its EBITDA loss dropped by half, to $900,000 versus the same quarter in 2007. Other encouraging trends in the first quarter include revenue of $5.2 million, up 43% compared to last year's first quarter; gross margins improved 350 basis points to 61.7% from 58.2% in the fourth quarter 2007, and all three areas of the business grew in the first quarter (retail cafés 40%, catering/delivery 31% and wholesale 94%). If not in 2008, it will most definitely be profitable in 2009. (To learn how to break thest numbers down for yourself, check out our tutorial Advanced Financial Statement Analysis.)

Restocking the Management Department
The company is making key hires to fill out the management team. In April, it hired Jeanette Davidson, who is experienced in the catering business, as vice president of sales. It also recruited Peter Tremblay, a 10-year Starbucks operations veteran, as VP of retail operations. It should help expansion go smoothly. Add in a strong board that includes Pete Meehan, the CEO of Newman's Own Organics and Dave Smith, co-founder of garden tool company Smith & Hawken, and you have the makings of a very successful business.

Bottom Line
Organic and locally grown foods continue to grow in popularity. Companies like Hain Celestial, United Natural Foods and Whole Foods Markets bring healthy food to the consumer. Organic To Go has taken this trend to it's next logical step and brought it to the fast casual restaurant business. The future looks bright.

Learn to put your money where your mouth is, in our related article Sinking Your Teeth Into Restaurant Stocks.

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