J & J Snack Foods Corp.

Moat: 3/5

Understandability: 2/5

Balance Sheet Health: 4/5

J & J Snack Foods Corp. manufactures and distributes a variety of branded snack foods and beverages, primarily in the food service and retail supermarket industries.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview: J & J Snack Foods Corp. (JJSF) operates primarily within the food and beverage industry, manufacturing and distributing a variety of branded snack foods and beverages. They segment their businesses into three main areas: Food Service, Retail Supermarkets, and Frozen Beverages.

Food Service: This segment, contributing most of the company’s revenue, includes soft pretzels, churros, handheld sandwiches, frozen novelties, and baked goods. The products are distributed mainly to restaurants, schools, hospitals, and other foodservice locations.
Retail Supermarkets: This segment focuses on selling snack and frozen products through retail supermarket channels and includes brands like SUPERPRETZEL, BAVARIAN BAKERIES, and WHOLE FRUIT.
Frozen Beverages: The frozen beverage division is mainly operated under ICEE, SLUSH PUPPIE, and PARROT ICE names and includes slush, frozen, and smoothie beverages. They sell these to a variety of locations, from retail stores to amusement parks.

The company’s overall business is diversified, but reliant on the food service industry.

The company’s products include both branded and private label products. This mix helps them balance profit margins with market share opportunities, but may impact margins when private labels are prioritized by customers.

Competitive Landscape: The competitive landscape for JJSF is quite diverse, consisting of both larger and smaller players in each of its segments. They face competition from other snack food and beverage manufacturers, as well as restaurant-specific suppliers. Competition is most intense in the frozen beverage category.

Competitors vary based on product type and distribution channel. For example, they face large packaged food companies in Retail Supermarkets, and smaller regional producers in the food service industry.
The ability of competitors to create similar products is high, as there are no proprietary ingredients in most products. Differentiation is mainly based on brand recognition, quality, and distribution network.

What Makes JJSF Different? JJSF’s diverse product offerings combined with its focus on niche markets like school cafeterias and amusement parks, along with its well-established distribution network, provides a certain level of insulation from direct competition.

The company’s long history and the fact that its product portfolio is diversified allows them to be present in multiple different venues.

Financials: JJSF’s financials show a somewhat mixed picture of growth and profitability.

Revenue Growth: Sales growth has generally been slow. For the six months ended March 30, 2024, the net sales were $489.4m, up 1% compared to the same period in 2023.
Operating Income: JJSF’s operating income was $46.1m for the six months ended March 30, 2024, compared to $47.1m for the same time period the previous year. This demonstrates the mixed effect of increased sales combined with higher costs and expenses. While the company’s margin has increased, this change is due to an accounting adjustment.
Profitability: Profits are relatively flat, though there has been some improvement in margin percentage, due to less input and supply costs. However, inflation, commodity prices, and freight costs, could have a negative impact on profitability in the coming periods.
Acquisitions have also played a part in JJSF’s historical growth, but has sometimes led to expenses related to the acquisitions. They have added brands like “Dippin Dots” in 2022.

The latest report for six-months ended March 30, 2024, shows that while revenue and earnings have improved, the business still faces some challenges in regards to costs and margins.

Moat Rating: 3/5. JJSF has some economic moats but is not overly robust.

Brand Recognition: Brands like SUPERPRETZEL and ICEE do carry recognition, but these can be replicated, and brand recognition doesn’t always mean higher prices, but mainly better sales.
Distribution Network: They have a well established distribution network that allows them access to various markets, but such networks are replicable.
Switching Costs: Switching costs for the customers are relatively low. They can change the supplier of soft pretzels or frozen beverages relatively easily, resulting in little to no stickiness.

They don’t have any substantial patents, exclusive products, network effects, or very large scale that could protect it from competition.

Risks to the Moat:

Commodity Price Volatility: JJSF’s products depend on commodities (like flour, oil, sugar, etc.), so fluctuations in prices have a major effect on profitability.

Competition: High competition in the snack and frozen food industry may lead to downward pricing pressures and thus reducing the margin.
Customer Preferences Change: The preferences of consumers change quite rapidly. Thus, the company needs to be nimble and keep innovating to keep its existing customers and acquire new ones.
Supply Chain Issues: Supply chain issues, especially in a global world, can negatively impact production and the profitability of the company.
Regulation Regulations on food ingredients or quality could make the company’s products more expensive and less profitable.
M&A: Management has a track record of growing by acquiring smaller businesses. These can cause volatility in financials.
Debt: The company does have long-term debt which they are paying down in small amounts every year, but can lead to financial pressure if their profits ever decline.
Customer Concentration: J&J Snacks has some large customers that create the possibility of a disruption in revenues if the relationship between them deteriorates.

Business Resilience:

JJSF does have strong and recognizable brands that can mitigate a decline, but is not as resilient to competitive pressures and changes as other companies that have a wider economic moat.
The company has shown it is able to survive over the years even with varying market conditions. So, the company is quite resilient, but has limited ways of increasing its profitability over time.

The long term prospects for profitability for JJSF depend on whether it can protect its earnings from competitors, increase its efficiency, or develop new products or strategies that drive growth without diluting returns.

Understandability Rating: 2/5. JJSF’s operations are straightforward on a surface level. They make snack foods and beverages and sell them. However, the details on how the business is run are somewhat complex. It is difficult for an outside analyst to understand where and how they are creating economic value, since the company’s different subsidiaries and brand products have overlapping channels, and it is hard to determine which segment is providing the most value for the company. There are some aspects of the business model, such as their focus on certain niches in foodservice and also their acquisitions, that makes understanding the business difficult.

Balance Sheet Health: 4/5 JJSF has a pretty healthy balance sheet.

The company’s assets ($1,277 million) are greater than its liabilities ($744 million).
The company’s current assets cover its current liabilities by a factor of ~1.5. This signifies the company’s short term health.
It has a fairly small amount of long-term debt at ~$400 million, but still high. The management is, however, trying to decrease it in the future, which makes the debt a lesser risk.
The company doesn’t hold a lot of cash. They mainly use cash to make new investments to grow or to buy smaller companies.

Overall, the company does show good strength in its assets. But still, its heavy reliance on debt might be a long-term concern.