Business context and reporting period
J&J Snack Foods Corp. manufactures and sells snack foods and distributes frozen beverages to foodservice and retail supermarket customers. This unaudited Form 10-Q covers the three and six months ended March 30, 2024; comparisons are with the periods ended March 25, 2023. Amounts below are in millions of dollars unless noted.
Financial performance and liquidity
| Metric | Q2 2024 | Q2 2023 | Six months 2024 | Six months 2023 |
|---|---|---|---|---|
| Net sales | $359.7 | $337.9 | $708.0 | $689.2 |
| Gross profit | $108.2 | $90.4 | $202.8 | $181.2 |
| Gross margin | 30.1% | 26.8% | 28.6% | 26.3% |
| Operating income | $17.9 | $10.2 | $27.6 | $19.5 |
| Operating margin | 5.0% | 3.0% | 3.9% | 2.8% |
| Net earnings | $13.3 | $6.9 | $20.6 | $13.5 |
| Diluted EPS | $0.69 | $0.36 | $1.06 | $0.70 |
- Six-month operating cash flow was $61.7, versus $35.7 a year earlier. Capital expenditures were $36.6, down from $49.1; cash dividends paid were $28.4.
- Cash and cash equivalents were $43.6 at March 30, 2024, compared with $49.6 at September 30, 2023.
- Long-term debt was $17.0, down from $27.0 at September 30, 2023. The company reported $198.2 of unused credit availability, net of letters of credit, and compliance with its financial covenants. The outstanding borrowing rate averaged 6.94%.
- Operating lease liabilities totaled $160.9, up from $94.1 at September 30, 2023. Operating right-of-use assets were $154.1, compared with $88.9.
Material changes versus the prior comparable periods
- Q2 sales increased 6.5%; six-month sales increased 2.7%. Management attributed growth across both periods to all three business segments.
- Gross margin improved 3.3 percentage points in Q2 and 2.3 points for the six months. Management cited improved product and pricing mix, productivity, and more stable input-cost inflation; lower costs for flour, oils, dairy and eggs were partly offset by inflation in chocolate and other ingredients.
- Net earnings rose 94.0% in Q2 and 52.6% for the six months. Improved gross profit and lower interest expense contributed; income tax expense also increased.
- Q2 segment sales and operating income: Food Service $230.0 and $7.9; Retail Supermarkets $52.9 and $5.1; Frozen Beverages $76.9 and $4.9. Retail Supermarkets operating income rose from $0.5 to $5.1, alongside sales growth and improved mix and margin.
- For the six months, Food Service sales grew 0.4%, Retail Supermarkets 8.1%, and Frozen Beverages 6.7%. Food Service growth included churros for a major quick-service restaurant customer; soft pretzel sales remained pressured by soft consumer trends.
Outlook, management commentary, risks and unusual items
- The filing provides no specific revenue, earnings, or margin guidance. Management said cash, expected operating cash flow and borrowing capacity should be sufficient for the next twelve months and beyond, including growth and expansion.
- Management notes frozen beverage and frozen novelty sales are generally higher in the fiscal third and fourth quarters due to warmer weather; interim results are not necessarily indicative of full-year results.
- Distribution expenses included one-time regional distribution-center transition costs of $2.3 in Q2 and $4.5 for the six months. New distribution-center openings also contributed to higher lease assets and liabilities. Marketing expense rose with licensing fees on new churro business and promotional spending.
- Input costs, labor and insurance costs, customer consolidation, sales trends, execution of manufacturing and distribution, acquisitions, taxes and interest rates are identified as factors that could affect results. The company cautions that forward-looking statements are subject to risks and actual outcomes may differ.
- The company paid related-party NFI Industries $29.4 for distribution and shipping-related costs during the six months; a company director is NFI’s CEO and an owner. The filing states the agreements have terms believed consistent with arm’s-length arrangements.
- On April 8, 2024, after quarter-end, the company acquired the Thinsters cookie business for approximately $7.7 in cash, subject to adjustments. Purchase-price allocation details were not yet available.
- The company reported no expected material adverse effect from its ongoing legal proceedings and no material change in previously disclosed risk factors. Disclosure controls were assessed as effective; no material change in internal control over financial reporting was reported.
Important facts for investors to verify
- Whether gross-margin improvement persists as input costs and product mix change, particularly given continuing inflation in chocolate and other ingredients.
- Whether sales momentum continues across segments, including Food Service’s soft pretzel and handheld trends and retail frozen-novelty performance.
- Whether distribution-center transition costs subside and the expanded lease commitments generate expected operating benefits.
- How inventory growth, cash generation, capital spending, dividends and credit-facility usage develop in subsequent quarters.
- The final purchase accounting and business performance for the Thinsters acquisition, and the ongoing terms and costs of the related-party NFI relationship.