The Freedom Foods Group Ltd (ASX: FNP) share price is non-existent right now. The company is still operational, but in accordance with its wishes, Freedom Foods shares will not be publicly available for trading until 30 October 2020. That’s over 3 months away (in case maths isn’t your strong suit!).
It’s starting to look like a rather spectacular fall from grace for this niche foods manufacturer. So what can we learn from this debacle?
Freedom isn’t free
I have a confession here. I (thankfully in hindsight) don’t own Freedom Foods shares. But it was a company I considered investing in a few months ago. The thing I found attractive in Freedom was its strong brand and the fact I could see the company growing in the ‘health foods’ market niche.
Healthy eating is a long-standing but growing trend. As Australians became more health-conscious and congruently more affluent over the past decade, demand for gluten-free, allergy-friendly foods and snacks boomed. Freedom markets a range of ‘health-conscious’ foods that cater to these trends, including A2 milk (not to be confused with the a2 Milk brand), dairy-free products, plant-based milks, and wholegrain snacks. The company has a large portfolio of brands which include the eponymous ‘Freedom Foods’, as well as Cheeky Monkeys, Heritage Mill, Barley+ and Arnold’s Farm. Freedom Foods told investors in its 2019 annual report that sales increased by 34.9% year on year. That’s a growth rate I found exciting.
Freedom shares lose their liberty
But things have recently started unravelling for the company. On 24 June, Freedom Foods announced that its CEO, Rory Macleod, would go ‘on leave pending a further announcement that is expected to be made early next week’. The shares were then suspended from trading for 14 days.
Then, on 26 June, the company announced Mr Macleod would be permanently leaving his CEO role and the company entirely, just 2 days after ‘going on leave’. It was also announced that Freedom Foods’ Chief Financial Officer (CFO) would be leaving, and the stock would stay off the ASX trading desks until 30 October.
The catalyst for this fracas appears to be the revelation that Freedom Foods has discovered some significant issues regarding its balance sheet. It was ‘discovered’ that inventory stocks had been misrecorded. $25 million has already been written off by the company, and Freedom is investigating if further write-downs are required to reflect obsolete stock, out of date stock, and product withdrawals. As my Fool colleague James Mickleboro reported at the time, this is expected to lead to an additional write-down of approximately $35 million, which means Freedom is looking at a total of ~$60 million in writedowns for FY2020.
What can we learn from Freedom’s woes?
That a strong brand in a growing market isn’t enough to make a great investment, that’s what. At the end of the day, a company is only as strong as its management, and that has been Freedom’s downfall. It’s clear that there have been some seriously questionable activities going on behind closed doors at the company. When I see a fiasco like the one described above, I would need to see some big changes. It’s even possible that there is a ‘culture’ issue at Freedom Foods that a management shakeup might not even resolve. As such, I’m very happy to be watching this sorry saga from the sidelines, until I can see the ship has been righted. Until then, I’m just sitting back with some popcorn until the Freedom Foods share price is back on the market.
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More reading
- Here are the 10 most shorted shares on the ASX
- Why the Freedom Foods share price will be suspended until 30 October
- ASX 200 rises 1.4%, Collins Foods delivers tasty returns
- Here’s why the Freedom Foods share price will be suspended for 14 days
- ASX 200 finishes higher, Afterpay hits new record
Motley Fool contributor Sebastian Bowen has no position in any of the stocks mentioned. The Motley Fool Australia has recommended Freedom Foods Group Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.
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