J&J Snack Foods Corp. 10-Q Summary
Business Context and Reporting Period
This filing is a Quarterly Report (Form 10-Q) for J&J Snack Foods Corp. for the period ended June 30, 2007. The company operates four reportable segments: Food Service, Retail Supermarkets, The Restaurant Group, and Frozen Beverages. The company is an accelerated filer and is not a shell company. As of July 16, 2007, there were 18,674,893 shares of Common Stock outstanding.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2007 | Nine Months Ended June 30, 2007 | Three Months Ended June 24, 2006 | Nine Months Ended June 24, 2006 |
|---|---|---|---|---|
| Net Sales | $162,510 | $406,692 | $140,132 | $360,747 |
| Gross Profit | $55,658 | $133,313 | $50,733 | $119,076 |
| Gross Margin % | 34.25% | 32.78% | 36.20% | 33.01% |
| Operating Income | $18,806 | $32,136 | $16,748 | $26,939 |
| Net Earnings | $12,497 | $21,635 | $10,786 | $17,933 |
| Diluted EPS | $0.66 | $1.14 | $0.57 | $0.95 |
| Cash & Equivalents | $15,646 (June 30, 2007) $17,621 (Sept 30, 2006) | |||
| Marketable Securities | $25,000 (June 30, 2007) $59,000 (Sept 30, 2006) | |||
| Operating Cash Flow (9mo) | $36,405 (2007) vs $29,071 (2006) | |||
| Debt | No outstanding balances on $50M credit facility. |
Note: All financial figures are in thousands, except per share amounts.
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 16% ($22.4M) for the quarter and 13% ($45.9M) for the nine months. Approximately $15.7M of the quarterly increase and $31.8M of the nine-month increase were attributable to acquisitions (Hom/Ade, Radar, Slush Puppie, Whole Fruit, Fruit-A-Freeze, and ICEE of Hawaii). Organic sales growth was 5% for the quarter and 4% for the nine months.
- Margin Compression: Gross profit margin decreased to 34.25% (quarter) and 32.78% (nine months) from 36.20% and 33.01% respectively. Management attributes this to higher commodity costs ($2M impact in the quarter, $5M for nine months) and the inclusion of lower-margin acquired businesses (specifically Daddy Ray's).
- Operating Expenses: Total operating expenses increased but decreased as a percentage of sales (23% vs 24% for the quarter). Marketing expenses included $842,000 (quarter) and $1.76M (nine months) for a TV/Internet campaign for the SUPERPRETZEL product.
- Segment Performance:
- Food Service: Sales up 15% (quarter) and 12% (nine months). Soft pretzel sales declined 4% in the quarter due to volume loss at one customer.
- Retail Supermarkets: Sales up 20% (quarter) and 16% (nine months), driven by soft pretzel and frozen juice/ice sales.
- Restaurant Group: Sales declined 31% (quarter) and 27% (nine months) due to store closures and licensing.
- Frozen Beverages: Sales up 18% (quarter) and 16% (nine months). Service revenue increased 20% (quarter) and 27% (nine months).
- Acquisitions: Significant activity included the acquisition of Hom/Ade Foods (Jan 2007), Radar Inc. (Jan 2007), Whole Fruit/Fruit-A-Freeze brands (Apr 2007), and an ICEE territory (Jun 2007).
Guidance, Outlook, and Risks
- Outlook: Management expects to continue being impacted by higher commodity pricing. Share-based compensation is anticipated to be approximately $1,000,000 net of tax for the fiscal year ending September 29, 2007.
- Liquidity: The company maintains a $50,000,000 revolving credit facility with no outstanding balances as of June 30, 2007. Cash and marketable securities are considered sufficient to fund future growth.
- Dividends: A quarterly cash dividend of $0.085 per share was declared, payable July 6, 2007.
- Risks & Contingencies:
- Commodity Costs: Rising costs for raw materials are pressuring gross margins.
- Seasonality: Sales of frozen beverages and juice bars are generally higher in the third and fourth quarters due to warmer weather.
- Foreign Currency: Fluctuations in the Mexican peso impacted stockholders' equity by $21,000 (increase) for the nine months ended June 30, 2007.
- Accounting Standards: The company is evaluating the impact of FIN 48 (Accounting for Uncertainty in Income Taxes) and SAB 108 but does not anticipate material cumulative adjustments.
Investor Verification Checklist
- Acquisition Integration: Verify the performance of recently acquired brands (Hom/Ade, Radar, Slush Puppie) against pro forma expectations and assess the timeline for margin normalization.
- Commodity Hedging: Review management's strategy for mitigating rising commodity costs, which reduced gross margins by approximately 1.5% in the quarter.
- Restaurant Group Decline: Investigate the long-term strategy for the Restaurant Group segment, which saw a 31% sales decline due to store closures.
- Customer Concentration: Note the specific mention of volume declines at "one customer" in the Food Service soft pretzel and funnel cake categories; assess the risk of concentration.
- Cash Deployment: Monitor the use of cash reserves ($15.6M cash + $25M securities) given the aggressive acquisition pace ($52.7M used for purchases of companies in the nine months).