Lancaster Colony: Reports Q2 Sales and Earnings

Westerville / OH. (lc) Lancaster Colony Corporation reported results for the company’s fiscal second quarter ended December 31, 2017. Highlights for the quarter are as follows:

  • Consolidated net sales decreased 2.2 percent to USD 319.7 million versus USD 326.8 million last year.
  • Retail net sales declined 1.9 percent to USD 179.3 million as continued growth for Olive Garden® dressings, a full quarter of sales contribution from Angelic Bakehouse, reduced trade spending and lower coupon expenses were more than offset by the impact of disruptions in the production and supply of our «New York Brand» Bakery frozen garlic breads and a slowdown in late-December outbound shipments due to insufficient freight capacity.
  • Foodservice net sales decreased 2.5 percent to USD 140.4 million driven by the ongoing challenges of diminished customer traffic and lower same-store sales in the U.S. restaurant industry. Sales to our national chain restaurant accounts, including limited-time-offer programs, were below the prior-year amount, partially offset by inflationary pricing. Consistent with the Retail segment, late-December outbound shipments of products to Foodservice customers were slowed by insufficient freight capacity.
  • Consolidated gross profit declined USD 9.8 million to USD 83.9 million driven by the impact of the lower sales volume, notably higher commodity costs and increased freight costs. Savings realized from our lean six sigma program and inflationary Foodservice pricing served to partially offset these costs. Note that the prior-year results reflect the benefit of significantly lower ingredient costs with only a modest offset from deflationary pricing which, combined with the lower freight costs, led to last year’s record-high gross profit in the second fiscal quarter. Selling, general and administrative expenses increased USD 2.3 million driven by increased amortization and other recurring noncash charges attributed to Angelic Bakehouse, continued investments in business growth initiatives and a favorable non-recurring item in the prior-year’s corporate expenses related to closed business operations.
  • Consolidated operating income declined to USD 47.3 million from USD 59.4 million in the prior year on the lower gross profit and increased SG+A expenses. The Retail and Foodservice segments were unfavourably influenced by the factors referenced above, resulting in operating margin declines from 23.5 percent to 20.8 percent in Retail and from 13.3 percent to 9.6 percent in Foodservice.
  • Net income was USD 45.9 million, or USD 1.67 per diluted share, compared to USD 39.0 million, or USD 1.42 per diluted share, last year. The taxes based on income amount of only USD 1.8 million in the current-year quarter reflects the favorable impact of the Tax Cuts and Jobs Act of 2017 (Tax Act), which includes the cumulative effect of both a lower federal income tax rate and a one-time benefit of USD 9 million resulting from the preliminary re-measurement of our net deferred tax liability. The estimated favorable impact of the Tax Act on second quarter net income was USD 14.5 million, or USD .53 per diluted share.
  • The regular quarterly cash dividend paid on December 29, 2017 was USD .60 per share, a nine percent increase over last year’s amount. The company’s balance sheet remained debt free on December 31, 2017 with USD 178.8 million in cash and equivalents.

For the six months ended December 31, 2017, net sales were nearly flat at USD 618.6 million compared to USD 618.1 million a year ago. Including the beneficial impacts of the Tax Act, net income for the six-month period totaled USD 75.3 million, or USD 2.74 per diluted share, versus the prior-year amount of USD 72.4 million, or USD 2.63 per diluted share. Based on the Tax Act’s lower federal income tax rate and excluding the one-time benefit of USD 9 million resulting from the preliminary re-measurement of our net deferred tax liability, the year-to-date effective tax rate was reduced to 28.3 percent to reflect the blended tax rate for the full fiscal year ending June 30, 2018.

CEO David A. Ciesinski commented, «Our fiscal second quarter was marked by several challenges including a shortfall in our projected net sales with the production and supply disruption for our «New York Brand» Bakery frozen garlic breads notably impacting our Retail segment results. The continued slowdown in away from home dining and lower levels of limited-time-offer program volumes combined to impact our Foodservice business. The net sales declines were compounded by commodity cost headwinds and increased freight costs. We are implementing corrective actions to recover and meet demand for the frozen garlic bread products, but nonetheless expect those sales to remain constrained through the end of our fiscal third quarter. With regard to commodity and freight costs, while we anticipate some reduction from the very high levels we experienced in the second quarter, we expect these costs to remain above last year’s level for the balance of our fiscal year. Early in our fiscal third quarter, selective price increases were implemented in both our Retail and Foodservice segments in response to the higher commodity and freight costs. Additional Retail price increases are planned for early in the fourth quarter of our fiscal year. We will also continue to generate cost savings from our lean six sigma program to help offset the higher commodity and freight expenses».

«On the sales volume front, we will address our challenges through improved execution and new product introductions. For example, late in our fiscal second quarter we were excited to introduce a 3-pack of Buffalo Wild Wings® sauces to the retail club store channel under a license agreement with Buffalo Wild Wings as part of a retail test for their brand. In the coming months we will add a Parmesan Ranch flavor to our Retail segment’s line of Olive Garden® dressings. Note that this year’s earlier Easter holiday will also shift some sales into our fiscal third quarter».

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