Lancaster Colony Corporation (NASDAQ:LANC) reported its fiscal third quarter 2024 results, showcasing the company's ability to navigate a dynamic consumer landscape. The specialty food manufacturer and marketer delivered record net sales of $471.4 million, up 1.4% year-over-year, and record gross profit of $104.5 million, up 10.9% year-over-year.

Business Overview

Retail Segment

The Retail segment, which accounts for over 50% of total revenue, saw net sales increase 0.3% to $248.1 million. This was driven by volume gains in the company's successful licensing program, led by strong performance from Chick-fil-A sauces and dressings, Olive Garden dressings, and the newly introduced Subway sandwich sauces and Texas Roadhouse steak sauces. Retail segment sales volumes, measured in pounds shipped, increased 1.5%, outpacing the sales dollar growth as the company invested in trade spending to support household penetration growth and new item launches.

Foodservice Segment

The Foodservice segment reported a 2.6% increase in net sales to $223.4 million, driven by increased demand from several of Lancaster Colony's national chain restaurant account customers and volume gains for its branded Foodservice products. However, deflationary pricing was a headwind to Foodservice segment sales growth. Foodservice segment sales volumes, measured in pounds shipped, increased 3.9%.

Financials

For the nine months ended March 31, 2024, Lancaster Colony reported annual net income of $123.8 million and annual revenue of $1.42 billion. The company generated annual operating cash flow of $225.9 million and annual free cash flow of $135.7 million.

Gross margin expanded 190 basis points to 22.2% in the quarter, driven by favorability in pricing net of commodity costs (PNOC), the company's cost savings initiatives, and volume growth. This was partially offset by a $2.6 million inventory write-down resulting from Lancaster Colony's decision to exit its perimeter-of-the-store bakery product lines, specifically the Flatout and Angelic Bakehouse brands.

Selling, general, and administrative (SG&A) expenses decreased 11.8% to $57.2 million, reflecting reduced expenditures for Project Ascent, the company's enterprise resource planning (ERP) initiative. Lancaster Colony recorded $12.1 million in restructuring and impairment charges related to the exit of its perimeter-of-the-store bakery product lines, which were not allocated to the reportable segments due to their unusual nature.

Operating income increased 19.5% to $35.1 million, driven by the gross profit improvement and SG&A reduction, partially offset by the exit costs. The company's effective tax rate for the quarter was 23.2%.

Outlook

Looking ahead, Lancaster Colony expects Retail segment net sales to continue benefiting from its expanding licensing program, including incremental growth from the recent additions of Subway and Texas Roadhouse sauces. In the Foodservice segment, the company anticipates continued volume growth from select quick-service restaurant customers and its branded Foodservice products, though deflationary pricing is projected to remain a headwind.

Regarding gross profit, Lancaster Colony expects reduced PNOC favorability in the fiscal fourth quarter compared to the third quarter, as commodity deflation becomes less pronounced. However, gross profit will continue to benefit from the company's ongoing cost savings program.

Liquidity

Lancaster Colony's balance sheet remains strong, with $164.8 million in cash and no outstanding debt as of March 31, 2024. The company's capital expenditures for fiscal 2024 are estimated to be approximately $65 million, reflecting a decline from the previous year's spending as the Horse Cave expansion project has been completed.

Conclusion

The company's long-term growth strategy focuses on three key pillars: accelerating core business growth, simplifying the supply chain to reduce costs and expand margins, and pursuing strategic M&A and licensing opportunities. Lancaster Colony's leading market positions, recognized innovation, and strong customer relationships in both the Retail and Foodservice segments position the company well to navigate the evolving consumer landscape and capitalize on emerging trends.

Overall, Lancaster Colony's fiscal third quarter results demonstrate the company's ability to deliver consistent performance and adapt to changing market conditions. The company's focus on cost management, strategic investments, and portfolio optimization positions it for continued success in the quarters and years ahead.