J&J Snack Foods Corp. (NASDAQ:JJSF) Q1 2024 Earnings Call Transcript February 6, 2024
J&J Snack Foods Corp. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Thank you for standing by, and welcome to J&J Snack Foods’ Fiscal 2024 First Quarter Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. [Operator Instructions]. I would now like to hand the call over to Norberto Aja, Investor Relations. Please go ahead.
Norberto Aja : Thank you, operator. And good morning, everyone. Thank you for joining J&J Snack Foods fiscal 2024 first quarter conference call. We will start in just a minute with the management’s comments and your questions. But before doing so, let me take a minute to read the Safe Harbor language. This call contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. As such, all statements made on this call that do not relate to matters of historical facts should be considered forward-looking statements, including statements regarding management’s plans, strategies, goals, expectations and objectives and our anticipated financial performance. These statements are neither promises nor guarantees that involve known and unknown risks, uncertainties and other important factors that may cause results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements.
Factors discussed in our annual report on Form 10-K for the year-ended September 30, 2023, and there are other filings with the Securities and Exchange Commission, could cause actual results to differ materially from those indicated by the forward-looking statements made on this call today. Any such forward-looking statements represent management’s estimates as of the date of this call, February 6, 2024. While we may elect to update forward-looking statements at some point in the future, we disclaim any obligation to do so even if subsequent events cause expectations to change. In addition, we may also reference certain non-GAAP measures on the call today, including adjusted EBITDA, operating income or earnings per share, all of which are reconciled to the nearest GAAP measure in the company’s earnings press release, which can be found in our Investor Relations section of our website.
Joining me on the call today is Dan Fachner, our Chief Executive Officer, along with Ken Plunk, our Chief Financial Officer. Following management’s prepared remarks, we will go ahead and open the call for a question-and-answer session. With that, I would now like to turn the call over to Mr. Dan Fachner, J&J Snack Foods’ Chief Executive Officer. Please go ahead, Dan.
Dan Fachner : Thank you, Norberto, and good morning, everyone. We appreciate you joining us this morning to discuss J&J Snack Foods fiscal 2024 first quarter results. I am pleased with our ability to successfully manage through a challenging consumer environment with many of our customers experiencing year-over-year declines in consumer traffic and consumption. Our customers adapted to consumer trends by reducing inventories ahead of the holiday season, especially in product categories like pies, cookies and frozen novelties. I am proud of how the J&J team leveraged our iconic brands and incremental customer opportunities to maximize every sales opportunity in the first quarter. This resulted in a sales decline of just under 1%, largely in line with the trends in the overall industry.
While we experienced a 4.1% decline in sales across our Food Service segment, driven by softness in our bakery, we saw resilience in Retail and continued strong growth in Frozen Beverages as sales grew 1.6% and 8.5%, respectively. Our ongoing focus on gross margin expansion resulted in a 130 basis points improvement to 27.2%, driven by our strategy to grow higher margin core products as well as continued gains in overall productivity. Importantly, the success of our strategic initiatives is becoming increasingly visible. Despite softer sales, we delivered a meaningful year-over-year improvement in the overall profitability of the business, including a 20.6% increase in adjusted operating income and a 19.2% increase in adjusted EBITDA. I’d like to take a few minutes talking about our sales performance in the quarter.
We have never been more confident in our ability to grow even as our industry faces a more challenging consumer environment. For J&J, it’s about continuing to leverage innovation and cross-selling opportunities to expand placements of our core products and brands. Our business is gaining incremental opportunities and is well positioned as consumption trends improve. Here are a few insights into the performance of our core brands and products during the first quarter. In our Retail segment, sales of our soft pretzel products increased 27.4% compared to the prior year. Bavarian sticks, a new product launched late in fiscal 2023 is now the number two best seller in the super pretzel retail product portfolio. We also gained incremental items within our Super Pretzel portfolio across major retailers, including Public, Stop & Shop and Woodman’s to name a few.
Moving to soft pretzels in our Food Service segment. Sales declined 4%, primarily driven by soft traffic trends in key channels. However, the team did gain new business, including the launch of a super pretzel field Helapenonot nationwide with a major theater customer and incremental sales gains in Pretzel bites and buns. Also, several national fast casual chains are making pretzels a permanent part of their menu. We continued to gain market share this quarter compared to last year. Let’s talk about churros. We continue to see strong momentum across the Food Service segment and remain excited about the growth opportunities. The team successfully secured an opportunity with Subway to manufacture a foot long churro for all U.S. locations. This rollout began in the first quarter and is already exceeding expectations.
We also began to roll out up churros with a major food distributor in September of 2023, and they have recently doubled their original order given the strong momentum. Finally, we are leveraging innovation with flavor extensions such as the recent launch of our Chocolate build churro that is driving new sales opportunities. Our HOLA! CHURROS brand is also performing at or above expectations in the Retail segment. We expanded distribution at Wakefern, Schunk, Giant Landover and grocery supply and are awaiting feedback from additional retailers. Sales for Dippin’ Dots, which is part of the Food Service segment, were slightly positive for the quarter, led by an approximate 3.5% increase in sales of our top 30 customers. This was, however, offset by some softness in the franchisee part of the business.
We continue to see growth opportunities for Dippin’ Dots and are moving quickly to activate new business. Just this past quarter, we completed the rollout of Peter Piper Pizza extended our agreement with Chuck E. Cheese through 2027 and received a commitment from a convenience store customer for another 200 placements. In addition, we continue to expand across the theater channel with ongoing rollouts at Cinemark, commitments to install vending at 56 locations for Marcus Theatres and incremental tests at a third major theater chain. Moving to Frozen Beverages. This segment posted an 8.5% increase in sales, led by the continued strength of ICEE. Overall, theater volume increased for the quarter compared to the prior year, but was below expectations due to lower performing movie releases and softer traffic.
Sales in Mexico, the amusement channel, mass merchandise retailers and restaurants increased for the quarter. The rollout of a new self-serve program for a major club customer is delivering strong results with over 100 locations converted to date with plans to continue rolling out locations in the second quarter. We also had a positive impact from our churros marketing campaign at major retail outlets such as Target as well as continued overall C-store channel strength. Looking ahead, we are excited about a major QSR opportunity entering a test phase in Q2. Also, we received a commitment from our partners at Dave & Buster’s to roll out across 150 locations by late April. As previously mentioned, frozen novelties declined in the quarter as key customers reduced orders and inventory levels in this category.
This impacted our year-over-year sales growth for most of our key brands, but we continue to grow faster than the market in many areas. In fact, our Luigi’s Italian Ice brand gained market share compared to top competitors during the quarter, and our team secured incremental retail shelf placements at additional grocery retailers. Products like our ICEE branded novelty and Dogsters continue to perform well. I’m really excited about our Dogsters as it delivered strong results, outpacing the growth of our largest competitors. Dogsters also recently gained incremental shelf placements something we expect will continue as retailers reset later in 2024. We continue to see strong growth opportunities across our frozen novelty portfolio as we approach peak season for spring and summer seasons.
Finally, I’d like to talk about our bakery business. For the quarter, bakery sales decreased 6.4%, driven entirely by the impact of reduced customer orders for pies and cookies during the holiday season. Many of our largest customers experienced lower traffic and moved the tighter management of inventory to manage through softer consumption trends. Looking ahead, we are focused on product innovation that drives more profitable sales while we continue rationalizing lower-performing SKUs. This strategy is helping us improve bakery gross margins while identifying new selling opportunities. On the growth front, we recently secured new cookie opportunities with several customers, introduced cakables and seasonal cookies across a handful of partners, and we are working on opportunities to launch Pretzel Croissant and SUPERPRETZEL BAVARIAN buns in the retail outlets across grocery, in-store bakery and convenience.
From an operational perspective, as we have mentioned on prior calls, we continue to execute initiatives to enhance overall operations and to better support our growth opportunities. Starting with our supply chain strategy. We have now opened two of the three distribution centers, Terrell, Texas and Woolwich, New Jersey. These two new DCs are exceeding expectations and will enable us to continue driving productivity improvements in our supply chain. We are scheduled to open the third DC in Glendale, Arizona, in the second quarter. In fact, I think we’re opening it this week. Shifting to operations. The addition of six new production lines gives us the capacity and flexibility to grow core products such as pretzels, churros and frozen novelties across new customers and channel opportunities.
These lines also create production efficiencies and higher output and metrics through better automation, which improves product margins and profitability. Our team is aligned and focused as we execute the five core strategies: grow and protect our brands, dominate core categories, cross-sell the portfolio, invest in our future and embrace our culture. In closing, I want to thank our J&J employees for their unwavering commitment to establishing a winning culture and to their commitment to our partners and customers. The diverse nature of our business along with the power of our brands and the channel diversity of our products is something that we are confident will continue to serve us well in fiscal 2024 and beyond. Our company has never been more aligned in its vision and strategy, and we are excited about the opportunities ahead of us to deliver long-term value to our employees, partners and shareholders.
With that, I would now like to pass the call over to Ken to review our financial performance in more detail. Ken?
Ken Plunk : Thank you, Dan, and good morning, everyone. As Dan just discussed, we are pleased with our team’s ability to navigate a softer consumer environment in fiscal Q1. For the quarter, we did experience a slight sales decline compared to the prior year, but were in line with overall industry trends. As Dan stated, we were executing our strategy, improving operational efficiency and profit margins and expanding growth opportunities across channels and customers. This helped balance declines in consumer traffic and consumption that impacted many of our customers. Net sales for the quarter totaled $348.3 million, down 0.9% versus the prior year. Food Service, our largest segment saw sales decreased 4.1% to $228.6 million, primarily reflecting reduced inventories of pies and cookies among certain customers during the holiday season as well as a decline in handheld sales due to a contractual cost true-up agreement.
Bakery sales decreased 6.4% and handheld sales declined 6.5% in the quarter. Although volume sales for our core Food Service and handhelds did increase for the quarter. These declines were partially offset by our churros category, which grew 8.9% as we continue to drive growth in this high-margin business. Sales of soft pretzels and frozen novelties declined 4% and 3.3% in the quarter respectively, driven by the previously discussed consumer pressures. This led to Q1 ’24 Food Service segment operating income of $6 million or a decrease of 5.8% versus the prior period. This reflects softer sales and onetime costs associated with the opening of our New Jersey distribution center, which impacted distribution expenses. Moving to our Retail segment.
Q1 ’24 retail sales increased 1.6% to $43.8 million compared to Q1 of ’23. Handheld sales grew by 90.5% and while soft pretzel sales increased 27.4% led by our continued expansion of SUPERPRETZEL products into retail. Frozen novelties and biscuit sales declined 28.4% and 11.1%, respectively, versus the prior year period. This resulted in Q1 ’24 Retail segment operating income of $0.5 million or a decrease of 59.3% versus the prior year period, driven by product mix, lower gross margin and the onetime costs associated with the opening of the New Jersey distribution center. As it relates to our third segment, Frozen Beverages, sales were $75.9 million and beat Q1 of ’23 sales by 8.5%. Beverage sales grew 8.5% or $3.3 million higher than Q1 ’23, led by solid performance across key channels, including convenience, amusement parks, mass merchants and restaurants.
Machine service revenues increased 3.1% versus the prior year period while equipment sales increased 26.8%, driven by strong growth from the convenience in QSR channels. Q1 operating income in the Frozen Beverage segment also improved $3.2 million, a 75.7% increase compared to Q1 of ’23. Our focus on gross margin expansion through an improved mix of core products, more line pricing and cost of goods efficiencies is clearly benefiting our results. For the quarter, gross profit totaled $94.6 million, a 4.1% increase compared to Q1 of ’23. This led to a gross margin of 27.2%, favorably compared to 25.9% in Q1 of ’23. Despite the softer consumer environment in fiscal Q1 ’24, we remain confident in our plans to improve profit margins and expect to achieve gross margin of 30% or better for the full year.
Overall, we experienced slight inflation for the quarter. The cost of ingredients, including flower, oil, dairy and eggs have declined. However, this was offset by double-digit inflation in sugars, sweeteners, mixes, chocolate and meats, which continue to impact products such as frozen novelty and baked goods. Looking at expenses. Total operating expenses increased $3.4 million or 4.1%, representing 24.4% of sales for the quarter compared to 23.2% in Q1 of ’23. It is important to note that during the quarter, we incurred $2.2 million in onetime expenses, reflecting transition costs related to the October opening of our second distribution center in New Jersey. This was a planned cost of our distribution network strategy and is expected to drive meaningful cost savings once we complete this initiative.
Our third distribution center will open in Glendale, Arizona in the second quarter and will incur similar onetime transition costs. Distribution costs were 11.6% of sales in the quarter compared to 12% in the prior year period, even with the previously mentioned onetime transition costs. The year-over-year improvement in distribution expense was already driven by more favorable inflationary environment and the benefits of our initiatives to improve logistics management and increase efficiency across our distribution network and supply chain. Marketing and selling expenses were 7.9% of sales versus 6.7% and in the prior period, driven primarily by incremental promotional marketing support on core brands and new products. Administrative expenses were 5.2% of sales in Q1 ’24 compared to 4.7% in Q1 ’23, attributable to investments in incremental resources as well as hosting our national sales meeting for the first time since the pandemic.
This led to an operating income of $9.7 million or a 3.8% increase compared to $9.3 million in Q1 of 2023. Adjusted operating income was $13.5 million or a 20.6% increase compared to Q1 ’23. After the impact of income taxes of $2.6 million compared to $2.3 million in Q1 of fiscal ’23, net earnings increased 9.8% to $7.3 million, resulting in reported earnings per share of $0.37 compared to $0.34 in the prior year period. Adjusted diluted earnings per share was $0.52 per share for the quarter compared to $0.42 in the prior year period. Adjusted EBITDA increased 19.4% to $30.2 million from $25.3 million in the prior year period, and our effective tax rate was 26.6% in the first quarter. Looking at our liquidity position. We continue to have a healthy balance sheet and overall strong liquidity position with $50 million in cash and approximately $7 million in debt.
Our ability to improve cash flow through working capital initiatives and stronger profitability is generating more cash to pay down debt, raise dividends and continue investing in our business. Our focus will continue to be on maintaining a healthy balance sheet and prudent leverage position, which enables us to continue investing in the growth of our business and returning value to our shareholders. In addition, we have ample availability under our revolver of approximately $208 million in additional borrowing capacity. In summary, we are executing our strategy and remain confident in our plans to continue driving profitable growth and value to our shareholders. I would now like to turn the call over to the operator for questions and answers.
Thank you.
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Q&A Session
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Operator: Thank you. [Operator Instructions] Our first question comes from the line of Andrew Wolf of CL King. Your question please, Andrew?
Andrew Wolf : Good morning, thank you. I wanted to ask about this contractual cost true-up with the handheld product. I guess it was the second quarter in a row. So first, is that kind of — is that a normal thing that happens quarterly and because there’s been such big swings in your cost — input costs, it’s worth calling out? Or is — just what’s the nature of that? Like how can we, on the outside, try to get a handle on how to model that and think about how that might occur going forward? And —
Dan Fachner : Yeah, good morning.
Andrew Wolf : Yeah, thank you. Good morning.
Ken Plunk: Yeah, good morning, Andrew. How are you doing?
Dan Fachner : I’m doing great. It’s a good question. It is a quarterly true-up. And we saw that as prices were — our costs were going up, and we’re seeing that as costs are coming down. We do it quarterly. Ken, do you want to add anything to that?
Ken Plunk: Yeah. It’s a larger amount. The reason we call it out, Andrew, is because of the phenomenon of the last few years. So the cost in many areas two years, 18 months ago, up 20%, that obviously drove the opposite. And then as those commodities have had deflation. We’ve been trued up quarterly, and it’s had the opposite effect, which is us passing and reducing that cost to that customer. And therefore, that has an impact on sales and on profits for that area. But we should lap the significance of that probably in the next quarter. We should be lapping that, Andrew, but that’s why that number has been as big as it’s been.
Andrew Wolf : Okay. And could you give us like the dollar amount, so we can at least think about what earnings would be on a kind of a commodity neutral basis? I realize it’s real money, but —
Ken Plunk: Yeah, it’s over $1 million — closer to close to $1.5 million, Andrew.
Andrew Wolf : Got it. And then I wanted to ask last one as a follow-up on the situation with Costco and the Churros, which at least according to the Internet. Costco is discontinuing churros and replacing them with cookie, chocolate chip cookie. Just wanted to confirm, is that accurate? And is that kind of going to be a firm impact you guys across Costco? And what the timing of that would look like? And when you look at your relationship with Subway, is it where do you end up net-net in a year’s time when those two events have matured rolled out?
Dan Fachner : Yeah, Andrew, this is Dan. That is a great question. Yeah, the account has rotated and they’ve done that in the past. They will offer different things periodically throughout time. They have a limited SKU within their locations, and so they do a rotation that churro has rotated off the menu at this point. That happened towards the end of December. And we saw some of the impact there. In regards to our Subway contract, we’re really excited about that. It’s a really good size opportunity for us, and it outweighs what we would potentially be losing at Costco, the Subway outweighs that just by the sheer numbers of locations, there’s 20,000 to 21,000 Subways out there today. And the product is being accepted really, really well. So we’re excited about the growth in the churros business.
Operator: Our next question comes from the line of Todd Brooks of the Benchmark Company. Please go ahead, Todd.
Todd Brooks : Hey, thanks. Good morning, to you both.
Dan Fachner : Good morning, Todd.
Todd Brooks : A couple of questions as well. Just want to ensure — if we look at the fourth quarter sales results, was there any operational friction in there that cost us anything on the revenue line either around the new RDC coming up during the quarter or maybe some of the new lines ramping to full productivity? Or did the shortfall on the revenue side really just reflect softer end market demand?
Dan Fachner : Yeah. No, Todd, it really did just reflect the softer market. And really, what we saw more than anything is inventories being tightened up across the board, not just with our customers, but with distributors as well. In fact, we have some data that would show really strong sales even during the month. When you look at IRI or Circana, but inventories certainly were narrowed down. And so you could somewhere make that assumption that somewhere down the line, those inventories will come back into play. It won’t happen in a January period or a February period, but it might happen as we get closer to spring. But the operational side did not affect sales going out in any way.
Todd Brooks : That’s good to hear. And Dan, you brought up January, February. Obviously, the data points to really kind of tough consumer traffic through the month of January here. And obviously, what’s going on in California is not helping right now. How do we think about what you’re hearing through the channel for just a slowdown in consumer traffic, whether they’re digesting holiday spend, whether it’s the Omicron lab from the prior year. There’s a bunch of different crosscurrents here. But what are you seeing in your end customer channels in Food Service?
Dan Fachner : Well, I think you’re reading probably the same data we’re reading as well. It’s hard to come off a quarter like we just come off and not be concerned or cautious about what the future looks like. We’re still very confident in our long-term strategy and what we’re doing, and we’re seeing that play out really well. And I think by the time that we close up the year, we’ll have another strong year. But we’re certainly cautious, and I think the consumer is cautious out there today. A couple of things that I’ve read that are interesting that I think makes a lot of sense to me. One, I do think we pulled back on inventory, and so I believe that inventory will come back around. The second is just the price increases that we had at such a rapid rate caused what they call kind of like a food reference price that people are shopping out there and they see a higher price and they’re waiting for that price to come back down.
And until water kind of seeks its own level, and you get used to that pricing, we may see a little bit of a softness there. Overall, I think it’s short-lived. I don’t know that for sure, but I think it’s short-lived. I don’t think that we can look at a January, February period of time and say, boy, that’s what we’re going to predict for the year. I feel really confident in the new business that we’re generating and the play that the team is executing. And I feel very confident about our long-term play still.
Todd Brooks : I think that’s correct. Sorry, go ahead —
Ken Plunk: Sorry, if I could just give a bit more context on sales. Because I went back and kind of look back at it and we thought we were going to have the stronger quarter than we did, not really expecting some of the consumer softness. But when you look at the last two years, we’re laying growth on top of a little over 10% growth a year ago Q1 and 32% growth two years ago, Q1. So the foundation of what we’re building growth on is on top of some really significant numbers. And a lot of that played out in post COVID and supply chain, and you kind of know the story there, but — to be able to have two segments to have positive sales growth on top of that in the environment that we saw in the quarter, we’re actually pretty happy about it, even as we continue to look at opportunities to continue to grow sales year-over-year.
Todd Brooks : Great. And one more, and I’ll jump back in queue. Dan, as you’re looking forward into ’24, you made the comment in the release you see building sales momentum for the balance of the fiscal year here. If we just put aside the consumer, the consumer is going to do what the consumer does if you look at kind of new customer wins, cross-sell success, new product launches, what sort of growth rate did those three, if you’re looking at the forward kind of pipeline deliver. And then we can all adjust for what we think the macro is on the back end as you’re thinking about fiscal ’24?
Dan Fachner : Yeah, I don’t know if we have a number to give you on that growth rate, Todd. But I just kind of remind you of some of the exciting things that the team is generating. Love the Subway opportunity and the way that it’s kicked off and how that’s going and it might even lend to some additional opportunities for us there that we’re working on as we speak today. Like the way that the and retail has kicked off. The Bavarian sticks moving up into the number two position of what we sell, and we see that a little bit unlimited at this point. Like some of the things that the bakery is doing. We’ve continued to narrow the bakery in rationalize some of the SKUs, but I like some of the things that they have going on right now with our cakables, which is the gourmet cookie and our seasonal cookies and working on sticks and buns in that area.
We’ve talked about ICEE and now rolling out the Dave & Busters. We’ve got a QSR that we’re going to test this quarter that I’m really, really excited about. The club store conversion to self-serve is working out great. We’re going to escalate the way that we install that. Dippin’ Dots’ growth in the theaters and convenience and just see a lot of the right things happening that can really impact our margins. And again, we talked about even on the operational side, the three DCs opening, the one in Glendale is actually opened yesterday. And so we’re starting to see that take effect the new lines doing well as we fill those up, just really encouraged by what the future looks like.
Todd Brooks : That’s great. Thanks, Dan.
Operator: Thank you. Please standby for next question. Our next question comes from the line of David Shakno [ph] of William Blair. Your question please, David.
