J&J SNACK FOODS CORP. Statements made in this Form 10-Q that are not historical or current facts are "forward-looking statements" made pursuant to the safe harbor provisions of Section 27A of the Securities Act of 1933, as amended (the "Securities Act") and Section 21E of the Securities Exchange Act of 1934 (the "Exchange Act"). These statements often can be identified by the use of terms such as "may," "will," "expect," "believe," "anticipate," "estimate," "approximate," "intend," or "continue," or, the negative thereof. We intend that such forward-looking statements be subject to the safe of the Act and the Exchange Act. We wish to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made. Any forward-looking statements represent management's best judgment as to what may occur in the future. However, forward-looking statements are subject to risks, uncertainties, assumptions, and important factors beyond our control that could cause actual results and events to differ materially from historical results of operations and events and those presently anticipated or projected. We disclaim any obligation subsequently to revise any forward-looking statements to reflect events or circumstances after the date of such statement or to reflect the occurrence of anticipated or unanticipated events. Objective This Management's Discussion and Analysis of Financial Condition and Results of Operations is intended to provide a reader of our financial statements with a narrative form from the perspective of our management regarding our financial condition and results of operations, liquidity and certain other factors that may affect our future results. The following discussion should be read in conjunction with the consolidated financial statements and accompanying notes included in Part I, Item 1 of this Quarterly Report on Form 10-Q and within the Company's Annual Report on Form 10-K filed for the fiscal year endedSeptember 24, 2022 . Business Overview The Company manufactures snack foods and distributes frozen beverages which it markets nationally to the foodservice and retail supermarket industries. The Company's principal snack food products are soft pretzels, frozen novelties, churros and bakery products. We believe we are the largest manufacturer of soft pretzels inthe United States . Other snack food products include funnel cake and handheld products. The Company's principal frozen beverage products are the ICEE brand frozen carbonated beverage and the SLUSH PUPPIE brand frozen non-carbonated beverage, The Company's Food Service and Frozen Beverages sales are made principally to foodservice customers including snack bar and food stand locations in leading chain, department, discount, warehouse club and convenience stores; malls and shopping centers; fast food and casual dining restaurants; stadiums and sports arenas; leisure and theme parks; movie theaters; independent retailers; and schools, colleges and other institutions. The Company's retail supermarket customers are primarily supermarket chains. 23 --------------------------------------------------------------------------------
RESULTS OF OPERATIONS - Three and six months ended
The following discussion provides a review of results for the three and six months endedMarch 25, 2023 as compared with the three and six months endedMarch 26, 2022 . Summary of Results Three months ended Six months ended March 25, March 26, March 25, March 26, 2023 2022 % Change 2023 2022 % Change (in thousands) (in thousands) Net Sales$ 337,854 $ 281,513 20.0 %$ 689,197 $ 600,003 14.9 % Cost of goods sold 247,470 216,165 14.5 % 507,958 455,280 11.6 % Gross Profit 90,384 65,348 38.3 % 181,239 144,723 25.2 % Operating expenses Marketing 24,017 21,036 14.2 % 47,716 41,943 13.8 % Distribution 38,188 28,349 34.7 % 80,237 61,664 30.1 % Administrative 17,919 11,719 52.9 % 34,310 22,088 55.3 % Other general expense (income) 67 156 (57.1) % (545 ) 95 (673.7) % Total Operating Expenses 80,191 61,260 30.9 % 161,718 125,790 28.6 % Operating Income 10,193 4,088 149.3 % 19,521 18,933 3.1 % Other income (expense) Investment income 401 160 150.6 % 1,086 431 152.0 % Interest expense (1,334 ) (57 ) 2240.4 %
(2,383 ) (75 ) 3077.3 %
Earnings before income taxes 9,260 4,191 120.9 %
18,224 19,289 (5.5) %
Income tax expense 2,389 920 159.7 % 4,720 4,927 (4.2) % NET EARNINGS$ 6,871 $ 3,271 110.1 %$ 13,504 $ 14,362 (6.0) % Comparisons as a Percentage of Net Sales Three months ended Six months ended March 25, March 26, Basis Pt March 25, March 26, Basis Pt 2023 2022 Chg 2023 2022 Chg Gross profit 26.8 % 23.2 % 360 26.3 % 24.1 % 220 Marketing 7.1 % 7.5 % (40 ) 6.9 % 7.0 % (10 ) Distribution 11.3 % 10.1 % 120 11.6 % 10.3 % 130 Administrative 5.3 % 4.2 % 110 5.0 % 3.7 % 130 Operating income 3.0 % 1.5 % 150 2.8 % 3.2 % (40 ) Earnings before income taxes 2.7 % 1.5 % 120 2.6 % 3.2 % (60 ) Net earnings 2.0 % 1.2 % 80 2.0 % 2.4 % (40 ) Net Sales Net sales increased by$56.3 million , or 20.0%, to$337.9 million for the three months endedMarch 25, 2023 . Net sales in the period included$16.0 million of net sales from Dippin' Dots. Net sales increased by$89.2 million , or 14.9%, to$689.2 million for the six months endedMarch 25, 2023 . Net sales in the period included$29.3 million of net sales from Dippin' Dots. Organic sales growth, across both the three months and six months endedMarch 25, 2023 , was driven by growth across all three of the Company's business segments, led by our core products including soft pretzels, churros, frozen novelties and frozen beverages. Gross Profit Gross Profit increased by$25.0 million , or 38.3%, to$90.4 million for the three months endedMarch 25, 2023 . As a percentage of sales, gross profit increased from 23.2% to 26.8%. While inflationary trends have gradually improved during the fiscal year, key ingredients including flour, oils, eggs, meats, sugar and dairy continued to experience inflationary pressures compared with the same quarter last year, with average raw material costs up approximately 9%. Three pricing actions implemented in fiscal 2022, along with the initial benefits of our operating initiatives, and improved cost management and productivity, helped to offset the impact of the inflationary pressures noted above. 24
-------------------------------------------------------------------------------- Gross Profit increased by$36.5 million , or 25.2%, to$181.2 million for the six months endedMarch 25, 2023 . As a percentage of sales, gross profit increased from 24.1% to 26.3%. Key ingredients including flour, oils, eggs, meats, sugar and dairy continued to experience inflationary pressures compared with the same six-month period last year, with average raw material costs up approximately 15%. Three pricing actions implemented in fiscal 2022, along with the initial benefits of our operating initiatives, and improved cost management and productivity, helped to offset the impact of the inflationary pressures noted above. Operating Expenses Operating Expenses increased$18.9 million , or 30.9%, to$80.2 million for the three months endedMarch 25, 2023 . As a percentage of sales, operating expenses increased from 21.8% to 23.7%, primarily reflecting the ongoing inflationary pressures across distribution and administrative costs, as well as the impact of Dippin' Dots. As a percentage of sales, distribution expenses increased from 10.1% to 11.3%, reflecting inflationary pressures noted in fuel and outbound freight. As a percentage of sales, marketing expenses decreased from 7.5% to 7.1%. As a percentage of sales, general and administrative expenses increased from 4.2% to 5.3%, with the increase largely attributable to the impact of Dippin' Dots. Operating Expenses increased$35.9 million , or 28.6%, to$161.7 million for the six months endedMarch 25, 2023 . As a percentage of sales, operating expenses increased from 21.0% to 23.5%, primarily reflecting the ongoing inflationary pressures across distribution and administrative costs, as well as the impact of Dippin' Dots. As a percentage of sales, distribution expenses increased from 10.3% to 11.6%, reflecting inflationary pressures noted in fuel and outbound freight. As a percentage of sales, marketing expenses remained relatively flat, decreasing slightly from 7.0% to 6.9%. As a percentage of sales, general and administrative expenses increased from 3.7% to 5.0%, with the increase largely attributable to the impact of Dippin' Dots. Other Income and Expense
Investment income increased by
Interest expense increase by$1.3 million to$1.3 million and by$2.3 million to$2.4 million for the three months, and six months, endedMarch 25, 2023 , respectively, due to the Company's outstanding borrowings on the Amended Credit Agreement. Income Tax Expense Income tax expense increased by$1.5 million , or 159.7%, to$2.4 million for the three months endedMarch 25, 2023 . The effective tax rate was 25.8% as compared with 21.9% in the prior year period, with the increase due to the impact of tax benefits on stock-based compensation expense in the prior year period. Income tax expense decreased by$0.2 million , or 4.2% to$4.7 million for the six months endedMarch 25, 2023 . The effective tax rate was 25.9% as compared with 25.5% in the prior year period. Net Earnings
Net earnings increased by
Net earnings decreased by
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.
25
--------------------------------------------------------------------------------Business Segment Discussion
We operate in three segments: Food Service,
Three months ended Six months ended
March 25, March 26, March 25, March 26,
2023 2022 % Change 2023 2022 % Change
(in thousands) (in thousands)
Net Sales
Food Service $ 218,281 $ 176,340 23.8 % $ 456,578 $ 388,072 17.7 %
Retail Supermarket 46,360 40,757 13.7 % 89,433 83,452 7.2 %
Frozen Beverages 73,213 64,416 13.7 % 143,186 128,479 11.4 %
Total Sales $ 337,854 $ 281,513 20.0 % $ 689,197 $ 600,003 14.9 %
Three months ended Six months ended
March 25, March 26, March 25, March 26,
2023 2022 % Change 2023 2022 % Change
(in thousands) (in thousands)
Operating Income
Food Service $ 5,133 $ 536 857.6 % $ 11,520 $ 9,537 20.8 %
Retail Supermarket 487 1,091 (55.4) % 1,598 6,075 (73.7) %
Frozen Beverages 4,573 2,461 85.8 % 6,403 3,321 92.8 %
Total Operating Income $ 10,193 $ 4,088 149.3 % $ 19,521 $ 18,933 3.1 %
Food Service Segment Results
Three months ended Six months ended
March 25, March 26, March 25, March 26,
2023 2022 % Change 2023 2022 % Change
(in thousands) (in thousands)
Food Service Sales to
External Customers
Soft pretzels $ 55,492 $ 43,261 28.3 % $ 107,715 $ 93,682 15.0 %
Frozen novelties 26,607 7,305 264.2 % 48,372 15,762 206.9 % Churros 24,920 17,447 42.8 % 50,677 36,936 37.2 % Handhelds 20,309 20,506 (1.0) % 43,881 39,001 12.5 % Bakery 85,300 83,967 1.6 % 194,248 191,798 1.3 % Other 5,653 3,854 46.7 %
11,685 10,893 7.3 %
Food Service Operating Income$ 5,133 $ 536 857.6 %$ 11,520 $ 9,537 20.8 % 26
-------------------------------------------------------------------------------- Sales to food service customers increased$41.9 million , or 24%, to$218.3 million for the three months endedMarch 25, 2023 , which included approximately$16.0 million in sales from Dippin' Dots. Soft pretzels sales to food service increased 28% to$55.5 million . Frozen novelties sales increased 264% to$26.6 million , largely driven by Dippin' Dots sales. Churro sales increased 43% to$24.9 million led by customer expansion and growing menu penetration. Sales of bakery products increased by 2% to$85.3 million . Sales of handhelds decreased by 1% to$20.3 million . Sales of new products in the first twelve months since their introduction were minimal in the quarter. Sales in the quarter benefited from the impact of the prior fiscal year's price increases, along with modest increases in volume.
Operating income in our Food Service segment increased
Sales to food service customers increased$68.5 million , or 18%, to$456.6 million for the six months endedMarch 25, 2023 , which included approximately$29.3 million in sales from Dippin' Dots. Soft pretzels sales to food service increased 15% to$107.7 million . Frozen novelties sales increased 207% to$48.4 million , largely driven by Dippin' Dots sales. Churro sales increased 37% to$50.7 million led by customer expansion and growing menu penetration. Sales of bakery products increase by 1% to$194.2 million . Sales of handhelds increased by 13% to$43.9 million . Sales of new products in the first twelve months since their introduction were minimal in the six months endedMarch 25, 2023 . Price increases benefited sales in the six-month period, and more than offset some volume declines seen in certain product categories.
Operating income in our Food Service segment increased
Retail Supermarket Segment Results
Three months ended Six months ended
March 25, March 26, March 25, March 26,
2023 2022 % Change 2023 2022 % Change
(in thousands) (in thousands)
Retail Supermarket
Sales to External
Customers
Soft pretzels $ 16,013 $ 15,752 1.7 % $ 30,498 $ 31,946 (4.5) %
Frozen novelties 20,770 18,919 9.8 % 38,739 36,721 5.5 %
Biscuits 5,858 5,687 3.0 % 13,771 13,958 (1.3) %
Handhelds 4,099 1,069 283.4 % 6,991 2,345 198.1 %
Coupon redemption (375 ) (726 ) (48.3) % (551 ) (1,622 ) (66.0) %
Other (5 ) 56 (108.9) % (15 ) 104 (114.4) %
Total Retail
Supermarket $ 46,360 $ 40,757 13.7 % $ 89,433 $ 83,452 7.2 %
Retail Supermarket
Operating Income $ 487 $ 1,091 (55.4) % $ 1,598 $ 6,075 (73.7) %
Sales of products to retail customers increased $5.6 million , or 14%, to $46.4
million for the three months ended March 25, 2023 . Soft pretzel sales increased
2% to $16.0 million , frozen novelties sales increase 10% to $20.8 million ,
biscuit sales increased 3% to $5.9 million , and handheld sales increased 283% to
$4.1 million with the increase in handheld sales largely driven by expansion
with a major retailer. Sales of new products in retail supermarkets were minimal
in the quarter. Sales in the quarter benefited from the impact of the prior
fiscal year's price increases, along with modest increases in volume.
27
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Operating income in our Retail Supermarkets segment decreased $0.6 million in
the quarter to $0.5 million primarily driven by gross margin challenges due to
higher promotions and allowances.
Sales of products to retail customers increased $6.0 million , or 7%, to $89.4
million for the six months ended March 25, 2023 . Soft pretzel sales decreased 5%
to $30.5 million , frozen novelties sales increased 6% to $38.7 million , biscuit
sales decreased 1% to $13.8 million , and handheld sales increased 198% to $7.0
million . Sales of new products in retail supermarkets were minimal in the six
months ended March 25, 2023 . Price increases benefited sales in the six-month
period and helped to offset volume declines seen in certain product categories.
Operating income in our Retail Supermarkets segment decreased $4.5 million in
the six months ended March 25, 2023 to $1.6 million primarily driven by gross
margin challenges due to higher promotions and allowances, and higher
distribution expenses.
Frozen Beverages Segment Results
Three months ended Six months ended
March 25, March 26, March 25, March 26,
2023 2022 % Change 2023 2022 % Change
(in thousands) (in thousands)
Frozen Beverages
Beverages $ 41,799 $ 35,365 18.2 % $ 80,458 $ 69,128 16.4 %
Repair and maintenance
service 22,585 21,000 7.5 % 46,412 43,011 7.9 %
Machines revenue 8,252 7,542 9.4 % 15,263 15,389 (0.8) %
Other 577 509 13.4 % 1,053 951 10.7 %
Total Frozen Beverages $ 73,213 $ 64,416 13.7 % $ 143,186 $ 128,479 11.4 %
Frozen Beverages
Operating Income $ 4,573 $ 2,461 85.8 % $ 6,403 $ 3,321 92.8 %
Frozen beverage and related product sales increased $8.8 million , or 14%, in the
three months ended March 25, 2023 . Beverage related sales increased 18% to $41.8
million . Gallon sales were up 12% for the three months led by continued
improving trends in travel, sporting events, concerts and amusement parks and
theater. Service revenue increased 8% to $22.6 million and machine revenue
(primarily sales of frozen beverage machines) increased 9% to $8.3 million due
to strong customer installation volume.
Operating income in our Frozen Beverage segment increased
Frozen beverage and related product sales increased$14.7 million , or 11%, in the six months endedMarch 25, 2023 . Beverage related sales increased 16% to$80.5 million . Gallon sales were up 7% for the six months endedMarch 25, 2023 , led by continued improving trends in travel, sporting events, concerts and amusement parks and theater. Sales remained strong for the period despite theater related volume declines in the first fiscal quarter due to the lower performing releases and weather-related impacts during the holiday season. Service revenue increased 8% to$46.4 million . Machine revenue (primarily sales of frozen beverage machines) decreased 1% to$15.3 million , primarily due to the comparative timing of customer installations in the first fiscal quarter. Operating income in our Frozen Beverage segment increased$3.1 million in the six months endedMarch 25, 2023 to$6.4 million , as strong sales drove leverage across the business. 28
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Liquidity and Capital Resources
Although there are many factors that could impact our operating cash flow, most notably net earnings, we believe that our future operating cash flow, along with our borrowing capacity, our current cash and cash equivalent balances and our investment securities is sufficient to satisfy our cash requirements over the next twelve months and beyond, as well as to fund future growth and expansion.
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