Margin growth suspended but volume growth continues
Nut distributor John B. Sanfilippo & Son, Inc.’s (JBSS) gross margin growth trend came to a halt in 2022. As I worried about raw nut costs in my last article, the real driver was higher manufacturing costs.
The declines in gross profit and gross profit margin were primarily due to manufacturing planning inefficiencies due to ongoing supply chain issues and rising inflationary costs, including labor , freight and manufacturing supplies.
Source: publication of JBSS 2Q 2022 results
This trend really became noticeable in the recently released fiscal second quarter. (The fiscal year ends on the last Thursday in June of each year.)
|thousands of dollars||2nd quarter 2022||2nd quarter 2021||Growth||1H 2022||1H 2021||Growth|
|Gross profit||52,230||52,795||-1.1%||104,033||92 127||12.9%|
The good news is that sales are increasing, both in dollars and in volume. (Volume is the total number of pounds of nuts sold)
The strongest growth came from non-consumer channels, which continued to benefit from an easing of pandemic restrictions with increased traffic in restaurants and convenience stores. Sales volume increased 27.1% in the commercial ingredients distribution channel and 11.4% in the contract packaging distribution channel. Nevertheless, these channels represent only a quarter of the company’s total sales. The majority of sales are still in the consumer distribution channel. JBSS continues to have great success with private label sales increasing 7.6%, driven by new distribution of trail mixes and snacks, almonds and mixed nuts with existing customers.
The company’s own brands continue to face the whims of a few very large customers. For example, Fisher Snack Nuts experienced a year-over-year decline in sales volume as a seasonal “club store” promotion in Q2 2021 was not repeated this year. Fisher also discontinued its line of inshell peanuts. Fortunately, the other brands all showed positive dollar sales growth. This includes Fisher Recipe Nuts which had struggled but this quarter outperformed their category average and gained market share. This despite a difficult market environment for the category, where pandemic demand for home baking ingredients has declined.
On the earnings call, management attributed improved Fisher Recipe nut sales to its recent spending on consumer research. The company plans to adopt further learnings from this research to continue to strengthen its brands.
Price increases help offset operating costs
As expected, JBSS also faced headwinds in operating costs. During the second quarter of the fiscal year, operating expenses increased by $9 million, or 36%, compared to last year. Consumer research mentioned above, as well as advertising and consulting expenditures added $3 million. Transportation inflation added $1.9 million and payroll added $0.5 million. Additionally, there was a one-time insurance settlement gain of $2.3 million in 2021 that was absent this year.
|2nd quarter 2022||2nd quarter 2021||Growth||1H 2022||1H 2021||Growth|
|Gross profit||52,230||52,795||-1.1%||104,033||92 127||12.9%|
These increases happened faster than the company could implement price increases. JBSS has largely completed these pricing conversations with its customers, but actual price increases began in early January and will be fully implemented in early March.
Although the operating margin of 7.2% seems low compared to recent history, it is still higher than the pre-pandemic years of 2017-2019, when the stock traded between $60 and $70. Operating profit is also significantly above 2017-19 levels, with sales about 10% above the average for those years.
Going forward, the price increases are expected to help improve the operating margin in the second half of fiscal 2022. Additionally, some of the additional operating costs were required to bring the product to market for the holiday rush in the 2nd quarter and therefore should not recur. With solid volume growth, price increases and stabilization costs, 2Q looks like a trough for operating profit and margin, and the stock is not expected to trade where it was at the mid-point. 2019.
As we can see in the cash flow summary table, higher manufacturing costs have impacted inventory build-up. Inventories (in dollars) are about 20% higher at the end of the first half than they were at the beginning of the year. This negatively impacted operating cash flow and forced the company to take on short-term debt in order to pay dividends of $3.00/share at the start of the fiscal year in August 2021.
This level of indebtedness is not alarming and remains on a downward trend in the longer term. As current inventory is sold at higher prices, I expect operating cash flow to improve, allowing debt repayment or a special dividend in May or August.
To conservatively estimate JBSS earnings for FY2022, I will project flat gross profit (sales growth offset by increased COGS). I’m guessing the company can recoup $5 million of the $9 million operating cost increase it saw in Q2. That would equate to $4 million after tax and translate to quarterly EPS of $1.48. To add more conservatism, I’ll assume the full impact won’t be felt until Q4, so Q3 EPS would be mid-$1.31. Adding the first-half actuals of $2.81, we get a full-year 2022 EPS forecast of $5.60 per share. At the close of trading after the earnings call, JBSS stock price was $78.86 for a P/E of 14.1. That’s cheap compared to the consumer staples sector’s multiple of 21.6 as calculated by Yardeni Research.
Since fiscal 2017, JBSS has maintained a dividend payout ratio of just over 100% of net profit on average. If we assume 100% for fiscal year 2022, the return would be 7.1%. In addition to the $3.00 paid last August, this would imply another special offer of $2.60 before the end of June.
|AF||PES||Dividend||The payout ratio|
This dividend level appears to be a best-case scenario and will depend on JBSS being able to push through its price increases and sustain them for some time, even if stocks can be replaced cheaply.
In my last article, with JBSS trading at $87.55 and inflation clearly on the way, I called JBSS a hold. The stock is now below $80, roughly where it traded in 2019. Sell levels are now about 10% higher than 2019 as the company has seen volume growth. Margins, although temporarily compressed, are no worse than 2019. The current pullback represents a buying opportunity. Investors who like a predictable dividend may be disappointed with the lack of a special dividend as seen in January 2021, but the company should be able to sustain one by the end of the fiscal year. in June or at the beginning of fiscal year 2023 with the regular month of August. Payment.