J & J Food Snacks: Resilient And Enduring Amidst The Pandemic
Summary
- J & J Food Snacks Corp. reported revenues recorded a 15% decrease over the first quarter of FY2020, but still an improvement compared to the 19% decline in the last quarter.
- A 33% increase in sales from the Retail Supermarkets segment was not able to cover significant losses from their main contributor – the Food Service segment.
- Net income suffered significantly with 90% contraction due to pandemic-induced sales pressure.
- Long-term debt is paid off continuously which provides financing avenues for the company’s future endeavors in product innovation and/or acquisitions to maximize growth potential.
- The pressure to prove that it is performing instead of an overvalued stock is in place as expectations are high for its growth in the following fiscal years.
Businesses are still struggling to return to their pre-pandemic operations, and this is still the case for J & J Snack Foods Corp. (NASDAQ: JJSF), a leading manufacturer of nutritional food snacks and frozen beverages distributor to the foodservice and retail supermarkets industry. The imposed lockdowns limiting human traffic brought about repercussions to the food industry through its ties to businesses that were severely affected by the pandemic. These lockdowns pushed some of the establishments selling food and beverages to operate in a reduced and limited capacity which impacted sales of manufacturers and distributors alike.
J & J Snack Food Corp.'s Performance
With two-thirds of their sales attributed to these foodservice venues, J & J Snack Food Corp.’s sales suffered significantly since the start of the pandemic and are continuing to do so despite their efforts to increase revenues from other avenues. The corporation reported a 15% decrease in sales for the first quarter of this fiscal year. Sales went down to $240.997 million from the $272.042 million of last year’s first quarter, as it remains challenged by the lingering impact of COVID-19 on consumers and customers. This was especially evident during the last Christmas season where establishments like these usually rely on the higher traffic to boost their sales up. Despite the decline, improvement can be seen with the 19% decrease in sales for the last quarter.
As mentioned, the food service segment is the largest contributor with 66% of the total quarterly sales followed by the Frozen Beverage segment with 17%, and the Retail Supermarket with 16%. Since the bulk of their revenue relies on the foodservice venues, the continued limited operation of key establishments like theme parks, schools, and theaters impacted the foodservice sales. Foodservice sales recorded a 13%.
Source: Macrotrends
The decrease compared to the last year’s first quarter despite the efforts of their sales and marketing team to develop new products and sales outlets that will compensate the unavoidable loss brought about by COVID-19 to their major revenue channel. All product lines under the foodservice segment experienced a reduction in sales except the handheld products wherein they recorded a 145% increase due to the development of a chicken bake product for Costco – one of their larger wholesale club customers. Sales from the Frozen Beverages segment also took a hit as it recorded a 41% decline, still due to the limited traffic from the theaters, amusement venues, and key retailers. With their operations still suffering from the COVID-19 impact-related concerns, expected sales volume from the Christmas season was not materialized affecting the corporation’s product segment. Service and machine revenues suffered from cancellations of the planned maintenance program for a key customer and losses from frozen beverage machine sales. On the other hand, the Retail Supermarkets segment was able to record a 33% increase versus the last year’s same quarter. The increase somehow cushioned the sales decline from the other segments but still falls short due to the relative share of the Food Service segment in terms of sales. Growth in sales was mainly driven by the increased consumer traffic and volume in supermarkets and retail stores, an interesting avenue to explore while waiting for the economy to open up and activities to return to normal.
Aside from affecting revenue channels, the pandemic affected the cost of producing goods as well. The current situation made it much more expensive to produce goods as large fixed expenses remain even with lower production volume and additional costs are incurred to follow safety protocols while operating. Gross profit as a percentage of the revenue is seen to be increasing compared to previous quarters but is still not in its normal range of 27% to 34% according to its 15-year record.
Source: Macrotrends
As long as the pandemic-induced sales pressure is present, the corporation’s net income is expected to suffer. Overall net income from all business segments totaled $1.778 million in the first quarter, a 90% decline from the pre-pandemic performance of 2020’s first quarter. The decline in overall sales partnered with large overhead costs and operating costs decreasing at a slower pace brought about this record low net income. But compared with the third quarter of 2020 where a net loss was incurred, improvement is seen from the next quarters. It is worth noting that for the last quarter of 2020, the corporation also benefitted from an income tax reduction related to state deferred taxes aside from higher earnings from its segments.
Source: Macrotrends
With losses and a notable reduction in its net income, it also follows that the diluted earnings per share are affected. The corporation opened the 2021 fiscal year with a $0.09 diluted EPS, missing analysts’ expectations badly. But as with the net income, we are gradually seeing improvements in it which is why it can be expected that the company will be able to weather through the crisis and return to its pre-pandemic trajectory.
Source: Macrotrends
With its EPS down for the last few quarters, it follows that its P/E ratio spiked in the last two quarters. This shows how investors are confident with the corporation’s 50-year long-standing. With its P/E ratio shooting up to 2589.5 as of Dec 2020, investors are willing to pay more for its future earnings growth. Short-term effects brought about by the pandemic did not tarnish the reputation of J & J Snack Foods Corp. when it comes to their growth acceleration.
Source: Macrotrends
Despite the effects of the pandemic on their operations, the company continues to give out dividends to its shareholders. A regular quarterly cash dividend amounting to $0.575 per share was announced last Dec 08, 2020, for the first quarter of the fiscal year 2021. Dividend yield stands at 1.49% compared to the last year’s first quarter at 1.12%.
Source: Macrotrends
Return on Assets ("ROA") for this quarter continues to dip with 0.17 compared to the 1.56 of FY 2020’s first quarter. It reflects the current struggle of the company to be profitable with its owned assets as it suffers the lingering effects on COVId-19 to its operations particularly to the lower production volumes in their plants as shutdowns were in effect across the state. Lower activities in plants for the previous quarters prevented the company to maximize its assets for revenue generation. Planned improvement on these facilities, along with product development, was put to a halt as they faced difficulties during the lockdowns and stay-at-home orders. With the majority of their operations and sales reliant on human interaction, we can expect a slow-paced recovery for the next few quarters.
Source: Macrotrends
The same is the case for its Return on Equity ("ROE"), with the first quarter reporting 0.37 compared to the 9.76 of FY2020’s first quarter. It has been posting declining ROE since the second quarter of FY 2017, a bad sign if you’re looking at it as it is. But seeing the bigger picture, you’ll then see the pattern that its ROE usually follows a trend wherein it will post increases as long as the company keeps on acquiring companies in line with their niche, and developing products either from their homegrown brands, new acquisition or partnership with other patented and household names in the food industry.
Source: Macrotrends
With the majority of its ratio and indicators decreasing, one good thing that is also decreasing is their Debt to Equity Ratio. Since they haven’t been able to expand in the last quarter, their debt continues to be paid off and freeing up their credit so they can utilize it in such time that it is needed. With less outstanding debt, it would be easy to finance acquisitions and new product development they have in line to further boost their sales and improve financial standing in the coming fiscal years.
Source: Macrotrends
Key Catalysts for Growth
New Product Development
With the recent success of their chicken bake for Costco, the corporation should continue to innovate food products that will appeal to its consumers as it had done in the past. Recovery from the effects of the pandemic lies in their ability to continue offering new products in the market to improve their presence in the supermarkets and retail stores and transform some of their food products and beverage to suitable selling forms for these venues. The struggles faced in the pandemic serve as an eye-opener on how the segments significantly vary as contributors to their total revenue, thus the need to reinforce other segments to adapt to the new normal once the economy further opens up.
Reopening of the Economy
With much of its sales tied to amusement venues that were heavily hit by the pandemic, the gradual reopening of the economy remains the tested and surefire way to bolster earnings for the next quarter. As soon as the operational limits for the majority of their customers are lifted, the corporation will regain lost revenues for the last year and continue on its growth path as planned before the pandemic struck. Reopening of schools will further up sale as President Biden prioritizes opening more schools as safely as possible across the states. Face-to-Face learning will prompt the opening of school cafeterias that also serve their food products and beverages to students.
Conclusion
J & J Snack Foods Corp. was not spared from the overwhelming effects of the pandemic despite being in the business for 50 years. Sales were notably impacted by the lockdowns and stay-at-home orders across states for the past year through the biggest contributor to their earnings – the foodservice establishments. With consumers pushed to buy packaged snacks from supermarkets, retail stores, and foodservice venues enjoined in them, they struggled to offset the lost earnings from their main money-maker. But they were keen to do so by developing new products and providing promotions to boost sales in their Retail Supermarkets segment and providing sales assistance for their Frozen Beverages segment through the likes of the hands-free cup and beverage dispensers and small format solutions to offer a wide range of customizable treats for their consumers. Efforts made in response to the challenges brought by the pandemic are expected to further improve their financial standing in the following quarters, showing how reliable of an investment it is. Although improvements have been seen and are expected, the phase of its recovery and growth will still rely on how fast they can realign resources to other income-generating pursuits all while waiting for the new normal that is here to stay. The pressure is on for proving how they are not an overvalued stock by realizing growth at par with its peer in the industry or faster than it is anticipated to.
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