By:
Meghan King, AIM Student at Marquette University
Disclosure:
The AIM Equity Fund currently holds this position. This article was written by
myself, and it expresses my own opinions. I am not receiving compensation for
it and I have no business relationship with any company whose stock is
mentioned in this article.
Summary
• John B. Sanfilippo & Son, Inc. (NASDAQ: JBSS) is a processor
and distributor of specialty nuts under a range of private brands such as
Fisher, Orchard Valley Harvest, and Sunshine Country. The company primarily
sells raw and processed nuts through various distribution channels to food
retailers, commercial ingredient users, and international packaging customers.
• Net Sales of $826
Million were distributed over three business channels: Consumer ($626MM, 71%),
Contract Packaging ($110MM, 13%), and Commercial Ingredients ($140MM, 16%). The
Consumer channel increased 6.1% since FY 18, with a strong year for salad toppings
and oven roasted cashews. Commercial Ingredients decreased 9.1% since FY 18, as
a result of lower consumer demand and inefficient management. Contract
Packaging decreased 24% since FY 18.
• Average retail nut
prices increased by 2% since FY 18 and by 5% since FY 15. The FY 2019 price per
pound is $6.16. Pistachio, Macadamia Nut, and Cashews increased price per pound
by 2-3%. Walnut, pecan, almond, and peanut declined by 1-2%. The rise in Cashew
prices adversely affected margins for FY 18.
• Orchard Valley Harvest, a private brand of JBSS, introduced new
products in 2019 and through an increased distribution and stronger velocity
net sales grew 16% in the consumer channel. I expect this label to see even better
success in 2020 after brand recognition has developed.
• Declining sales in the Fisher recipe is due to the rise of
alternatives in the grocery aisle. I would watch the future of this staple
product in their portfolio closely in order to gauge the changes in consumer
preference.
• Diversified brand
portfolio on Amazon with the introduction of two new products: Squirrel Brand
and Hunter Mix has drastically increased JBSS’s outreach and online presence.
• JBSS total outstanding
debt has declined 81% since 2007. Pay close attention to any changes in their capital
structure.
Key
points:
JBSS has placed a
stronger emphasis on their social media presence in 2019, with highlights on
the Food Network and through Instagram influencers. On the Food Network, having
recipes including JBSS branded products allows for more significant outreach to
the consumer. It is a competitive advantage for the company to target a group
of consumers who value a quality product. Moreover, their branded nuts as “Oven
Roasted, Not Fried” has been a wildly successful campaign. To promote this
brand, the company has supplemented the product with radio, in-store, FSI,
digital, and sampling advertisements. For the health-conscious consumer, this
differentiates the brand as a “smart option”. With recent studies being
published on the health benefits of frequent nut consumption, the brand and
products are inclined to see growth with this change in consumer preference.
New products allowed for
entrance into distribution sites such as Jewel Osco, Mariano’s, Walmart, and
Pick n Save, expanding the company to a wider network. A pillar of their growth
plan is to “expand consumer reach” and in 2019 they have introduced connections
with eCommerce (Online), Club Stores (Costco) Foodservice (Starbucks), and
Travel (Airports). Along with this initiative, comes their investments in
infrastructure. This includes, but is not limited to automation, equipment
upgrades, food safety equipment, and warehouse infrastructure. The benefits of
these additions will be realized in the coming years and will raise the value of
their stock.
What
has the stock done lately?
JBSS increased from a
3.8% yield in 2018 to a 6.4% yield in 2019. This increase is largely due to a
special increased dividend of $4.40. This marks 8 consecutive years of dividend
payments from the company. The stock has had an impressive year, going from
$54.98 on 1/2/2019 to a closing price of $97.70 on 12/2/2019. A change in the
leadership team and structure of the commercial ingredients channel will serve
as growth drivers for the coming year. A drop in contracted packaging is a
result of reductions in unit ounce weights for nut items and the discontinuance
of a substantial product line. The major driver for margin improvement was
volume increase and lower commodity costs in their consumer brand products.
Past
Year Performance:
Source:
FactSet
My
Takeaway
A large factor of their
margin growth is due to the change in product costs, specifically the
aforementioned nuts. My concern is whether or not the company will be able to
keep pace with this in 2020. Since this is heavily dependent on the price of
crop nuts, the company is exposed to the risks of commodity prices. Given the
fact that this is a typical concern of the industry, I have weighed this factor
less heavily in my recommendation.
The 2019-2020 initiatives
for growth in the company are strong factors for value in this stock. With a
wider distribution network and the introduction to new retail space, JBSS
private brands are in a strong position for the next year. Although the rise of
competition in the market has increased, I believe the strong brand recognition
and product preference will sustain the company in the foreseeable future and
remain a Buy recommendation.
Source:
FactSet
