J+J Snack Foods Reports Q3 Sales and Earnings

Pennsauken / NJ. (jj) J+J Snack Foods Corporation, a leading niche snack food and beverage company, announced sales and earnings for the third quarter ended June 25, 2016.

Sales for the third quarter decreased about 1/4 of one percent to 278.0 million USD from 278.7 million USD in last year’s third quarter. Net earnings increased 10 percent to 26.8 million USD in the current quarter from 24.5 million USD last year. Earnings per diluted share increased to 1.43 USD for the third quarter from 1.30 USD last year. Operating income increased 4 percent to 40.4 million USD in the current quarter from 38.8 million USD in the year ago quarter.

For the nine months ended June 25, 2016, sales increased 2 percent to 730.5 million USD from 716.5 million USD in last year’s nine months. Net earnings increased 10 percent to 55.4 million USD this year from 50.4 million USD last year for the nine months. Earnings per diluted share increased to 2.95 USD from 2.68 USD last year. Operating income increased 6 percent to 82.1 million USD this year from 77.2 million USD last year for the nine months.

Effective with this release, our earnings press release will contain detailed financial statements and commentary relating to our quarterly results of operations. In connection with this change in practice, we expect to file our quarterly reports on Form 10-Q on the third business day following our quarterly press release.

Gerald B. Shreiber, J + J’s President and Chief Executive Officer, commented, «Although we are pleased that our earnings for the third quarter and nine months are higher than last year, we are disappointed with our lack of sales growth».

Results of operations

Net sales decreased 743’000 USD or about 1/4 of 1 percent to 277’981’000 USD for the three months and increased 14’057’000 USD or 2 percent to 730’541’000 USD for the nine months ended June 25, 2016 compared to the three and nine months ended June 27, 2015.

Food service

Sales to food service customers increased 1’900’000 USD or 1 percent in the third quarter to 169’148’000 USD and increased 8’552’000 USD or 2 percent for the nine months. Soft pretzel sales to the food service market increased 3 percent to 44’410’000 USD in the third quarter and increased 1 percent to 125’943’000 USD in the nine months with sales increases and decreases in the third quarter spread among our customers and with sales of 1.2 million USD under an already ended limited time offer program to a new restaurant chain customer. Soft pretzel sales to restaurant chains were 13 percent higher compared to last year’s quarter primarily due to the above mentioned sales and for the nine months, soft pretzel sales to restaurant chains were marginally higher than last year.

Frozen juices and ices sales decreased 4 percent to 18’564’000 USD in the three months and were down 2 percent to 37’850’000 USD in the nine months with lower sales to one customer accounting for the entire decrease in both periods. Churro sales to food service customers increased 6 percent to 15’819’000 USD in the third quarter and were up 2 percent to 43’452’000 USD for the nine months with sales increases and decreases spread among our customers.

Sales of bakery products decreased 5’168’000 USD or 6 percent in the third quarter to 74’475’000 USD and decreased 3’365’000 USD or 1 percent for the nine months. Sales to one customer were down 4.4 million USD in the quarter compared to last year as the customer added a secondary supplier. We expect sales to this customer to be down approximately 1 million USD a month through January 2017.

Sales of handhelds increased 1’194’000 USD or 20 percent in the quarter with the sales increase split among two customers and 4’317’000 USD or 27 percent for the nine months with 90 percent of the increase coming from sales to one customer. Sales of funnel cake increased 4’463’000 USD or 109 percent in the quarter to 8’570’000 USD and 6’559’000 USD or 81 percent to 14’651’000 USD for the nine months primarily due to increased sales to school food service and to sales of 3.8 million USD in the third quarter to a new restaurant chain customer. We do not expect additional funnel cake sales to this customer until the second quarter of our fiscal year 2017.

Sales of new products in the first twelve months since their introduction were approximately 14 million USD in this quarter and 24 million USD in the nine months. Price increases accounted for approximately 900’000 USD of sales in the quarter and 6.8 million USD in the nine months and net volume increases, including new product sales as defined above, accounted for approximately 1.0 million USD of sales in the quarter and 1.7 USD in the nine months.

Operating income in our Food Service segment increased from 20’479’000 USD to 24’619’000 USD in the quarter and increased from 51’621’000 USD to 59’041’000 USD in the nine months. Operating income for both periods benefited from lower marketing expenses, lower ingredient costs, significantly increased volume of our handhelds and funnel cake products, pricing and more favorable product mix and was hurt by higher group health insurance costs and lower volume of our frozen juices and ices and bakery products.

Retail supermarkets

Sales of products to retail supermarkets decreased 4’115’000 USD or 10 percent to 37’013’000 USD in the third quarter and decreased 7’075’000 USD or 8 percent to 84’973’000 USD in the nine months. Soft pretzel sales for the third quarter were down 4 percent to 7’136’000 USD with sales increases and decreases spread over our customer base and products and were down 7 percent to 25’611’000 USD for the nine months. About one third of the pretzel sales decline in the nine month period was due to the discontinuance of SUPERPRETZEL BAVARIAN Soft Pretzel Bread and lower sales to two customers accounted for roughly 90 percent of the balance of the decline. Sales of frozen juices and ices decreased 3’383’000 USD or 11 percent to 26’038’000 USD in the third quarter and were down 8 percent to 48’009’000 USD for the nine months. Increased trade spending to introduce WHOLE FRUIT Organic juice tubes and new PHILLY SWIRL products and general declines in sales of our existing PHILLY SWIRL products accounted for all of the sales decline in frozen juices and ices in the nine months and over 80 percent of the decline in the third quarter. PHILLY SWIRL sales were down in both periods primarily because of lower sales to a customer in Canada due to the stronger US dollar, lower sales to one warehouse club store which carried fewer SKUS this year and decreased sales to one retail supermarket customer of a product that is being discontinued. We expect a significant improvement of sales of PHILLY SWIRL products in our fourth quarter compared to last year. Coupon redemption costs, a reduction of sales, which were higher in the first six months a year ago supporting the introduction of the SUPERPRETZEL BAVARIAN Soft Pretzel Bread, were essentially unchanged for the quarter at 826’000 USD and decreased 32 percent to 1’911’000 USD for the nine months. Handheld sales to retail supermarket customers decreased 18 percent to 3’813’000 USD in the quarter and decreased 21 percent to 11’121’000 USD for the nine months. Roughly 25 percent of the handhelds sales decline in the quarter and 40 percent for the nine months resulted from increased trade spending to introduce PILLSBURY mini dessert pies. The balance of the sales decline was spread over our customer base.

Sales of new products in the third quarter were approximately 2.5 million USD and were 4.5 million USD for the nine months. Price increases accounted for approximately 300’000 USD of sales in the quarter and 1.5 million USD in the nine months and net volume decreases including new product sales as defined above and net of decreased coupon costs, lowered sales by approximately 4.4 million USD in this quarter and 8.6 million USD in the nine months. Operating income in our Retail Supermarkets segment decreased from 6’406’000 USD to 4’266’000 USD in the quarter primarily because of approximately 600’000 USD of increased trade spending related to the introduction of WHOLE FRUIT Organic juice tubes, OREO churros, PILLSBURY mini dessert pies and other new products and sharply lower frozen juices and ices sales volume and decreased from 9’607’000 USD to 7’825’000 USD in the nine months primarily because of increased trade spending of 1.8 million USD for the introduction of new products as mentioned above and lower sales volume offset by 900’000 USD of lower coupon expenses.

Frozen beverages

Frozen beverage and related product sales increased 2 percent to 71’820’000 USD in the third quarter and increased 7 percent to 180’945’000 USD in the nine month period. Beverage related sales alone were down 1 percent to 44’352’000 USD in the third quarter and were up 4 percent to 102’966’000 USD in the nine month period. Gallon sales were essentially unchanged for the three months and were up 5 percent for the nine month period primarily due to higher sales to movie theaters. Service revenue increased 7 percent to 18’398’000 USD in the third quarter and increased 10 percent to 53’105’000 USD for the nine month period with sales increases and decreases spread throughout our customer base.

Sales of beverage machines, which tend to fluctuate from year to year while following no specific trend, were 8’942’000 USD, an increase of 16 percent from last year’s third quarter and were 23’911’000 USD, or 21 percent higher than last year, in the nine month period. The approximate number of company owned frozen beverage dispensers was 55’500 and 53’100 at June 25, 2016 and September 26, 2015, respectively. Operating income in our Frozen Beverage segment decreased to 11’552’000 USD in this quarter and 15’210’000 USD for the nine months compared to 11’926’000 USD and 15’998’000 USD in last years’ periods, respectively. Higher group health insurance costs of about 500’000 USD and flat gallons volume contributed to the lower operating income for the third quarter and higher group health insurance costs of about 1.1 million USD and a bad debt write off of 200’000 USD contributed to the lower operating income in the nine months.

Consolidated

Gross profit as a percentage of sales was 33.13 percent in the three month period this year and 32.43 percent last year. For the nine month period, gross profit as a percentage of sales was 30.75 percent this year and 30.49 percent a year ago. For both periods, gross profit percentage benefited from lower ingredient costs, pricing, increased handhelds and funnel cake business and more favorable product mix in our food service business offset by higher costs in our frozen beverages business and increased trade spending related to the introduction of WHOLE FRUIT Organic juice tubes, OREO churros, PILLSBURY mini dessert pies and new PHILLY SWIRL products in our retail supermarket business, as well as by sharply lower volume in our retail supermarket business.

Total operating expenses were essentially unchanged at 51’649’000 USD in the third quarter and as a percentage of sales increased from 18.51 percent percent to 18.58 percent. For the nine months, operating expenses increased 1’373’000 USD, and as a percentage of sales decreased from 19.71 percent to 19.51 percent. Marketing expenses increased to 8.5 percent of sales in this year’s quarter from 8.3 percent last year and were 8.7 percent of sales in both years’ nine months. Distribution expenses were 6.8 percent of sales in this year’s quarter and were 7.3 percent of sales in last year’s quarter, and were 7.5 percent in this year’s nine month period and 7.8 percent of sales last years’ nine month period. Distribution expenses benefited this quarter and nine months from lower fuel costs and shipping efficiencies. Administrative expenses were 3.1 percent of sales this quarter and 3.3 percent for the nine month period as compared to 2.8 percent of sales last year in the third quarter and 3.2 percent for the nine months.

Operating income increased 1’626’000 USD or 4 percent to 40’437’000 USD in the third quarter and increased 4’850’000 USD or 6 percent to 82’076’000 USD for the nine months as a result of the aforementioned items.

Investment income of 981’000 USD this year compared to a loss of 53’000 USD last year and was higher by 539’000 USD in the nine months. Last year’s investment income was reduced by realized losses of 1.4 million USD and 1.9 million USD in the three and nine months periods which compares to realized losses of 176’000 USD and 582’000 USD in this year’s three and nine months.

The effective income tax rate has been estimated at 35 percent and 37 percent for the quarter this year and last year, respectively and 35 percent and 37 percent for the nine months this year and last year, respectively. The effective income tax rate for the three months ended December 26, 2015 has been revised to 33.4 percent as a result of our early adoption in the March 2016 quarter of Accounting Standards Update NO. 2016-09, Improvements to Employee Share-Based Payment Accounting. Under this new standard, 499’000 USD of first quarter income tax benefit was recognized via a reduction of amounts previously recorded as additional paid in capital upon exercise of stock options. In the March 2016 and June 2016 fiscal quarters, we have realized a tax benefit of 89’000 USD and 163’000 USD; respectively, upon similar exercises of stock options. We are estimating an effective income tax rate of approximately 35 1/4-35 1/2 percent for the year, which includes approximately 3/4 of 1 percentage point decrease because of the above referenced change in accounting.

Net earnings increased 2’329’000 USD or 10 percent in the current three month period to 26’791’000 USD and were 55’357’000 USD for the nine months this year compared to 50’355’000 USD for the nine month period last year, an increase of 10 percent.

There are many factors which can impact our net earnings from year to year and in the long run, among which are the supply and cost of raw materials and labor, insurance costs, factors impacting sales as noted above, the continuing consolidation of our customers, our ability to manage our manufacturing, marketing and distribution activities, our ability to make and integrate acquisitions and changes in tax laws and interest rates.