J & J Snack Foods(US:JJSF)2023-01-31 21:22Financial Data and Key Metrics Changes - Net sales for the quarter were $351.3 million, growing by 10.3% compared to the prior year period [34] - Adjusted operating income was $11.2 million, with adjusted earnings per diluted share at $0.42, while net earnings decreased to $6.6 million, resulting in reported diluted earnings per share of $0.34, down from $0.58 in the prior period [15][36] - Total operating expenses increased to $81.5 million, representing 23.2% of sales for the quarter compared to 20.3% in Q1 of 2022 [14] Business Line Data and Key Metrics Changes - Food services, the largest segment representing approximately 68% of total sales, saw revenue of $238.3 million, exceeding Q1 2022 by $26.6 million or an increase of 30% [13] - Frozen Beverages revenue was up 9%, driven by a 15% increase in beverage sales and an 8% increase in service sales, although equipment revenue declined by 11% [8][35] - Frozen novelties were relatively flat in Q1, excluding Dippin' Dots sales, which are expected to drive profitability in the second half of the year [6][36] Market Data and Key Metrics Changes - The retail segment experienced a 1% sales increase for the quarter, reflecting softness in macroeconomic spending for consumables [29] - The company noted a significant increase in sales for the Dippin' Dots business, with unit sales up over 14% in the first quarter [26][142] - The company is seeing strong momentum in the churros business, with sales increasing by 32% due to the introduction of the Hola! Churros brand [28] Company Strategy and Development Direction - The company is focused on transforming the business by investing in brands, expanding production capacity, and building a strong pipeline of product innovation [137] - Strategic priorities include improving operational efficiencies through new automated production lines, outsourcing logistics, and optimizing the distribution network [143][144] - The company is evaluating potential M&A opportunities to complement its brand portfolio and business model [11] Management's Comments on Operating Environment and Future Outlook - Management acknowledged ongoing inflationary pressures and a softening consumer environment impacting year-over-year results, but expressed confidence in improved gross margins due to recent pricing actions [138] - The company remains optimistic about the balance of the year, citing strong initiatives underway that are expected to positively impact both top and bottom lines [34][110] - Management noted that 75% of sales and profitability typically occur in Q3 and Q4, indicating a seasonal business pattern [112] Other Important Information - The company has approximately $92 million in debt and $123 million of additional borrowing capacity available [37] - The first new regional distribution center (RDC) is expected to open in June, with plans for additional centers to enhance logistics and distribution efficiency [144] Q&A Session Summary Question: Impact of cold weather on sales - Management acknowledged that cold weather had an effect on sales, particularly during the holiday shopping season, but emphasized that it is not the key driver of performance [20][62] Question: Capital allocation and debt leverage for M&A - Management indicated that there is no specific leverage number set for potential M&A, but the board is supportive of leveraging the balance sheet for growth [42] Question: Dippin' Dots operating income trend - Management noted that Dippin' Dots typically has a negative impact on operating income in Q1, with most profitability expected in Q3 and Q4 [45][60] Question: Volume trends and inventory destocking - Management confirmed that there was some destocking of inventories by retailers, which contributed to volume declines in December [62] Question: Expectations for commodity cost inflation - Management expects commodity costs to decline, particularly for wheat, with a forecast of a 3% to 4% decrease in the second quarter [106]