JJSF - J&J Snack Foods: Positive Prospects Pricey Valuation

2023-11-30 10:47:05 ET

Summary

• J&J Snack Foods reports third consecutive year of double-digit sales growth and improving margins.
• The U.S. snack market is competitive, but J&J Snack Foods is aiming to grow faster than the market with a number of strategic growth initiatives.
• Stiff competition is a potential risk to anticipated future performance.
• While prospects are bright, valuation is pricey.

Another solid year for J&J Snack Foods ( JJSF ) with the company reporting its third consecutive year of double digit sales growth, while margins continue to recover. A number of strategic initiatives could support growth which bodes well for the company's outlook however a pricey valuation suggests prospects are likely baked in.

Company overview

J&J Snack Foods manufactures and sells snack foods and distributes frozen beverages primarily to foodservice and retail supermarket customers.

Snack foods manufactured and sold by the company include:

• Soft pretzels marketed under brand names “Superpretzel”, “Brauhaus” and “Bavarian Bakery”. Soft pretzels accounted for 19% of the company’s sales in FY2023;

• Frozen novelties marketed under brand names “Dippin’ Dots”, “Luigi’s”, “Whole Fruit”, “Icee”, “Dogsters”, “Philly Swirl” and Coca Cola-owned trademark “Minute Maid”. Frozen snack sales amounted to 17% of the company’s revenue in FY2023;

• Bakery products such as cookie dough marketed under brand names “Readi-Bake”, “Country Home”, “Mary B’s”, “Daddy Ray’s” and “Hill & Valley” as well as for private label customers and contract packing. Bakery products generated 26% of the company’s sales in FY2023;

• Churros marketed under brand names “¡HOLA!” and “California Churros”. Churros sales accounted for 7% of the company’s sales in FY2023;

• Other snack foods such as funnel cake marketed as “The Funnel Cake Factory” as well as other handheld products marketed under smaller brands. Handheld products accounted for 6% of the company’s revenue in FY2023.

Frozen beverages distributed by the company include frozen carbonated beverages sold under the “ICEE” brand and frozen non-carbonated beverages sold under the “Slush Puppie” brand. Frozen beverages accounted for 14% of the company’s revenue in FY2023.

FY 2023 performance

For the fiscal year ended September 2023, net sales rose 13% YoY to 1.558 billion, driven by organic sales growth across all three business segments (due to marketing investments, pricing actions, and additional product placements during the year) as well as revenue contribution from Dippin’ Dots which the company acquired in FY2022. FY2023 marks the third consecutive year of double digit top-line growth.

All segments reported growth during the year.

Gross margin improved to 30% in FY2023 from 27% the previous year, driven by enhanced production efficiencies, pricing actions, better product mix, as well as easing inflationary pressures particularly for key raw materials including flour, dairy and meats, prices of which either declined or remained materially unchanged helping offset double digit price increases for sugar and sweeteners.

Operating margin improved to 7% from 4.5% the prior year. Marketing spend as a percentage of revenue increased to 7% in FY2023 from 6.6% the previous year due to increased marketing investments to support new product launches and promote existing brands. Distribution expenses improved slightly to 11% of revenues from 11.6% the prior year driven by strategic efforts to enhance logistics efficiency.

U.S. snack food market is saturated but strategic initiatives may support growth above market averages

Looking ahead, the U.S. snack market is competitive and saturated with growth expected in the low single digits . Within the snack market, key categories in which J&J competes in including pretzels, biscuits, churros, and frozen desserts, are projected to see low single digit growth over the coming years. The U.S. pretzel market (in which J&J leads in the soft pretzels segment) is projected to grow around 4% , bakery products is projected to grow roughly around 3% , frozen desserts is projected to grow around 5% , and frozen drinks are projected to grow around 6% .

Management however is implementing a number of strategic initiatives as part of their ambition to drive growth above market averages. FY2023 results were supported by new product launches, channel expansion and marketing investments (notable initiatives include the launch of frozen SUPERPRETZEL Bavarian sticks with major grocery and mass merchant customers and the addition of new flavors for their Icee brand; SUPERPRETZEL availability expanded to Walgreens) a strategy management is leaning on to drive growth in the coming years. New launches in the pipeline include a new system-wide pretzel croissant, and a new cookie dough offering, and company management noted in their Q4 2023 earnings call that they continue to explore cross-selling opportunities to drive sales growth. Dippin’ Dots’ for instance has plenty of runway for channel expansion with the brand currently available in just about 25% of movie theater locations and management is aiming to boost the brand’s presence through cross-selling efforts targeted at establishments that already carry one of its other brands such as Icee, SUPERPRETZEL, and ¡Hola! Churros. Meanwhile just 13% of convenience stores carry Dippin’ Dots, a figure management is aiming to grow. The company is also exploring retail opportunities for Dippin’ Dots which currently has virtually no presence in the retail space. Management is confident of delivering results with double digit growth expected for Dippin Dots.

Management mentioned that they remain open to acquisitions to further bolster growth. The company is usually cash flow positive and has ample balance sheet flexibility with a debt to equity of just 13% .

Margins

With cost input conditions stabilizing, margin pressures are subsiding as well, and have room to recover; the company’s operating margin of 7% in FY2023 is an improvement from 4.7% in FY2022 but still well below their pre-pandemic operating margin of 9.8%. Management is implementing a number of measures to drive margin expansion including adjusting their bakery product mix to discontinue unprofitable SKUs, and upgrading their supply chain in an effort to increase logistics efficiency.

Risks

The U.S. snack food market is highly competitive and stiff competition may hinder growth and potentially impact margins due to higher marketing spend to defend market share. Beverage powerhouse Coca Cola is looking to intensify their focus on the frozen beverages segment (which accounts for over a fifth of J&J Snack Foods’ revenue), and competition is heating up in the pretzels space from rivals like Wetzel’s Pretzels , and Mondelez-backed Eastern Standard Provisions (pretzels generates nearly a fifth of J&J Snack Foods’ revenue).

Conclusion

J&J Snack Foods has a moderate buy analyst consensus rating .

Strategic growth initiatives including product innovation, marketing investments and channel expansion along with inorganic growth from acquisitions may continue supporting J&J Snack Foods’ above market-average growth rates going forward. Meanwhile margins may benefit from an easing of inflationary pressures along with margin expansion efforts including a shifting product mix and an upgrading of their supply chain. A growing top-line and expanding margin bodes well for free cash flows (which amounted to USD 67 million in FY2023).

A DCF analysis taking the factors above and the assumptions below however translates into a fair value of around USD 1.5 billion for J&J Snack Foods, well below their current market capitalization of USD 3.2 billion, suggesting the company’s prospects are likely baked in and could be viewed as a sell.

Additionally, the company appears rich in relative terms as well with their forward P/E of 29 being considerably higher than the sector median of 18.6.

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