Sunday, December 15, 2019

A Current AIM Small Cap Equity Holding: John B. Sanfilippo & Son, Inc. (JBSS, $97.70): “Going Nuts for Nuts”

John B. Sanfilippo & Son, Inc. (JBSS, $97.70): “Going Nuts for Nuts”
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.


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