New Flavors, Expanded Retail, And Calculated Pricing Drive Growth In A Challenging Market

Key Takeaways

• Expansion in theaters and amusement locations, alongside new product launches, bolsters sales as consumer confidence strengthens.
  
• Supply chain optimization and strategic pricing initiatives aim to enhance operational efficiencies and protect margins against inflation.
  
• Softer consumer trends and cost pressures, including reduced spending and inflation, challenge J&J Snack Foods' revenue growth and profit margins across key product segments.

Catalysts

Manufactures, markets, and distributes nutritional snack foods and beverages to the food service and retail supermarket industries in the United States, Mexico, and Canada.

• J&J Snack Foods is expanding placements for Dippin' Dots in theaters and amusement locations, and introducing new flavors for retail, which is expected to boost sales as consumer confidence improves. (Revenue)
  
• Anticipated new product launches and partnerships, such as churro fries with national QSRs and an expanded theater presence for Dippin' Dots, could drive incremental sales and market share. (Revenue)
  
• The roll-out of new retail products, including SUPERPRETZEL and Dogsters, alongside marketing investments, positions the company for growth in the grocery and pet product segments. (Revenue)
  
• Optimization of the supply chain, including the operation of 3 new regional distribution centers, is improving operational efficiencies and reducing costs, expected to positively impact gross margins. (Net margins)
  
• Strategic pricing initiatives in 2025, in response to inflation in raw material costs, aim to protect gross margins and offset input price pressures. (Net margins)

J&J Snack Foods Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming J&J Snack Foods's revenue will grow by 4.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 5.5% today to 7.3% in 3 years time.
• Analysts expect earnings to reach $128.9 million (and earnings per share of $6.78) by about November 2027, up from $86.6 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 32.8x on those 2027 earnings, down from 37.1x today. This future PE is greater than the current PE for the US Food industry at 19.1x.
• Analysts expect the number of shares outstanding to decline by 0.68% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 5.92%, as per the Simply Wall St company report.

J&J Snack Foods Future Earnings Per Share Growth

Risks

• Softer consumer trends and reduced spending in key channels such as amusement, theaters, and convenience stores are affecting sales, potentially leading to volatility in revenue growth.
  
• Challenges in consumer spending, including pressure from long-term food inflation and a rising cost of living, could impact net margins as price increases may not fully offset operating cost hikes.
  
• Decreased sales in high-margin products like frozen beverages and soft pretzels during the fourth quarter due to fewer selling days negatively impact gross margins and operating efficiency.
  
• Weakness in the frozen novelty segment, particularly with Luigi's in a declining Italianized category, could affect future earnings if efforts to reverse the trend are unsuccessful.
  
• Planned pricing adjustments due to ongoing inflation in raw materials such as cocoa and sugar may not be fully accepted by the market, leading to potential impacts on revenue and profit margins if consumer demand is adversely affected.

Valuation

• The analysts have a consensus price target of $187.25 for J&J Snack Foods based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $1.8 billion, earnings will come to $128.9 million, and it would be trading on a PE ratio of 32.8x, assuming you use a discount rate of 5.9%.
  
• Given the current share price of $165.12, the analyst's price target of $187.25 is 11.8% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.