Business Context and Reporting Period
Company: J & J Snack Foods Corp.
Filing Type: Form 10-K (Annual Report)
Period Ended: September 25, 2010 (52 weeks)
Business Overview: The Company manufactures nutritional snack foods (primarily soft pretzels under the SUPERPRETZEL brand) and distributes frozen beverages (primarily ICEE and SLUSH PUPPIE). Operations are divided into four segments: Food Service, Retail Supermarkets, The Restaurant Group, and Frozen Beverages. The Company is the largest manufacturer of soft pretzels in the U.S., Mexico, and Canada.
Key Financial Metrics
| Metric | Fiscal 2010 | Fiscal 2009 |
|---|---|---|
| Net Sales | $696.7 million | $653.0 million |
| Gross Profit | $227.8 million | $208.8 million |
| Gross Margin | 32.69% | 31.98% |
| Operating Income | $77.2 million | $66.9 million |
| Net Earnings | $48.4 million | $41.3 million |
| Diluted EPS | $2.59 | $2.21 |
| Total Assets | $484.0 million | $439.8 million |
| Long-Term Debt | $0 | $0 |
| Cash & Equivalents | $74.7 million | $60.3 million |
| Operating Cash Flow | $68.0 million | $80.6 million |
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 7% ($43.7 million) driven by volume increases and acquisitions (Parrot Ice and California Churros). Approximately $12.7 million of the increase was attributed to funnel cake fries sales to a single customer.
- Segment Performance:
- Food Service: Sales up 5% to $437.0 million; operating income up to $50.3 million.
- Retail Supermarkets: Sales up 17% to $76.1 million; operating income up to $11.3 million.
- Frozen Beverages: Sales up 8% to $182.8 million; operating income up to $15.7 million.
- Restaurant Group: Sales declined 33% to $0.8 million due to store closures; operating loss narrowed to $0.035 million.
- Profitability: Gross margin improved by 71 basis points due to lower ingredient/packaging costs and volume leverage. Operating income increased 15%.
- Acquisitions: Acquired Parrot Ice (Feb 2010) and California Churros (June 2010), contributing approximately $4.0 million in combined revenue for the fiscal year.
Outlook, Risks, and Management Commentary
- Cost Pressures: Management anticipates higher net earnings in 2011 may be impacted by significant increases in market costs for flour and other commodities, as well as higher operational costs.
- Customer Concentration: Top 10 customers accounted for 42% of sales in 2010. The largest single customer represented 8% of sales. Loss of major customers could materially impact results.
- Seasonality: Sales are seasonal, with higher demand for frozen beverages and juice treats during warmer months.
- Capital Allocation: The Company repurchased 203,507 shares of common stock for $7.8 million. A $50 million revolving credit facility remains available with no outstanding balance.
- Risks: Key risks include raw material price volatility, competition, foreign currency fluctuations (Mexico/Canada operations), and reliance on large customers.
Investor Verification Checklist
- Commodity Exposure: Verify the extent of hedging or forward purchasing for flour, sugar, and shortening given management's warning of rising costs in 2011.
- Customer Concentration: Assess the stability of the top 10 customers (42% of revenue) and the specific contract terms with the largest customer (8% of revenue).
- Acquisition Integration: Monitor the performance of the Parrot Ice and California Churros acquisitions to ensure they meet projected revenue and margin targets.
- Restaurant Group Decline: Confirm the strategic plan for the Restaurant Group segment, which continues to shrink (only 2 stores remaining) and operates at a loss.
- Capital Structure: Note the company maintains zero long-term debt but has significant capital lease obligations ($0.9 million) and operating lease commitments ($52.3 million).