Prepared remarks
Good day, and thank you for standing by. Welcome to the J&J Snack Foods third quarter 2026 conference call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Reed Anderson with ICR. Please go ahead.
Thank you, operator, and good morning, everyone. Thank you for joining the J&J Snack Foods fiscal 2026 third quarter conference. Before getting started, let me take a minute to read the safe harbor language. This call contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements made on this call that do not relate to matters of historical fact should be considered forward-looking statements, including statements regarding management's plans, strategies, goals, expectations and objectives as well as our anticipated financial performance. This includes, without limitation, our expectations with respect to the success of our cost savings initiatives and customer demand improvements in the sales channels in which we operate. These statements are neither promises nor guarantees and involve known and unknown risks, uncertainties and other important factors that may cause results, performance, or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements on the call today. Risk factors and other items discussed in our Annual Report on Form 10-Ks and our other filings with the Securities and Exchange Commission could cause actual results to differ materially from those indicated by the forward-looking statements made on the call today. Any such forward-looking statements represent management's estimates as of the date of the call today, August 5, 2026. While we may elect to update forward-looking statements at some future point, we disclaim any obligation to do so even if subsequent events cause expectations to change. In addition, we may also reference certain non-GAAP measures on the call today, including adjusted EBITDA, adjusted operating income, or adjusted earnings per share, all of which are reconciled to the nearest GAAP measure on the company's earnings press release, which can be found in our Investor Relations section of our website. Joining me on the call today is Daniel Fachner, our Chief Executive Officer, along with Shawn C. Munsell, our Chief Financial Officer. Following management's prepared remarks, we will open the call for a question-and-answer session. With that, I would now like to turn the call over to Mr. Fachner. Please go ahead, Daniel.
Good morning, and thanks, everyone, for joining today's call to discuss our third quarter results. We are proud of the progress we have made implementing our transformation initiatives, which helped to support earnings performance despite material fuel and freight pressures during the quarter. Gross profit improved about $1 million to $151 million and, consistent with the first half of the fiscal year, gross margin continued to expand, rising 240 basis points to 35.5%. Adjusted EBITDA came in at $67.4 million, a decrease of 6.4% from last year, and adjusted earnings per share were $1.96 versus $2.00 a year ago. The $4.6 million EBITDA decline from the prior year quarter was primarily attributed to freight and fuel cost pressures which together increased about $4.7 million net of surcharge collections. Net sales were $426 million, down 6.2% with over half of the decline attributed to an anticipated sales reduction in bakery. About 140 basis points of decline was attributed to our frozen beverage business, where higher beverage sales only partly offset lower service and machine sales. Retail sales improved 1.7% in the quarter as higher levels of promotions lifted volume. Looking ahead, sales momentum is building, and we expect the sales environment to improve in the fourth quarter with our toughest top-line comparison behind us. The impact of the anticipated bakery sales reduction peaked in our third quarter and will diminish in the fourth quarter to about 2.5% of prior year sales. We are shipping against several new meaningful pieces of business in the fourth quarter across our core portfolio that includes churros, pretzels, and frozen novelties. We also expect retail sales to improve further as we realize benefits from innovations and promotions while the sliding fee headwind diminishes. Our innovation rollout continues, and we have been pleased with the results. Some headwinds in service and machine sales are anticipated in the fourth quarter, but we expect beverage volume increases to partly offset those headwinds. Further, we have line of sight to begin closing the service revenue gap in the fourth quarter, with most of it closed by the first quarter of fiscal 2027. We expect the company to return to sales growth in fiscal 2027. The increase in fuel and freight expenses reflects higher oil prices and significant tightening of freight markets during the quarter. Fuel costs were about in line with expectations, while freight rates rose sharply as the quarter progressed. The freight increase primarily reflects constrained capacity because of regulatory and legislative changes. We are pursuing steps to mitigate some of the pressure. We expanded our application of fuel surcharges during the quarter and recently increased our minimum order quantities. While we expect fuel and freight pressures to persist in our fourth quarter, diesel prices have moderated from the highs earlier in the summer. With respect to segment performance, there are several bright spots in the quarter. In foodservice pretzels, we extended our category leadership, picking up 4.6 points of dollar share. Our retail segment had a solid quarter—net sales were up 1.7% as higher promotions supported volume. Moreover, we incurred higher slotting fees to support the rollout of new innovation, implying underlying growth in the mid single-digit range. Syndicated data for the 13 weeks ending July 12 showed retail pretzel sales up about 2% and novelties up 3%. Dogsters continues to perform exceptionally well with retail sales up over 30% in tracked channels. Over the same period, syndicated data shows Luigi's up over 20% aided by end-cap placements with a major customer. Retail Dippin' Dots growth was driven by the launch of the high-temp Dippin' Dots product as well as two more sundae flavors, with the brand up more than 100% in tracked channels for the 13 weeks ending July 12, with almost 4 million retail-measured sales. Within our frozen beverage segment, beverage volume increased mainly on the strength of theaters and mass merchandising channels, driving a net sales increase for beverage of 5.9%. A slate of solid movies in the quarter more than offset the success of the Minecraft movie in the prior year quarter. We are extremely encouraged by the movie lineup for the fourth quarter and for fiscal 2027, which includes the new record-breaking Spider-Man movie that was released this past weekend. The test with a West Coast QSR operator continues and we remain optimistic that it will conclude with a positive outcome soon. We are actively testing and expanding our footprint with both new and existing partners across convenience, theaters, and entertainment venues, and early signs are very encouraging. The more efficient cost structure we built through Project Apollo, along with the improved sales mix, has underpinned much of our gross margin expansion and puts us in a strong position as we look to return to top-line growth in fiscal 2027. Plant consolidation savings are ahead of target, giving us the confidence to raise the plant consolidation component of Apollo to at least $20 million of annualized savings. That would take the full program annualized run rate to at least $25 million. Further, our G&A initiatives were implemented in the quarter which helped to moderate administrative expenses, which were materially flat in the quarter. And despite the fuel and freight cost increases, we did realize distribution cost savings in the quarter from Apollo initiatives. Our innovation pipeline keeps gaining traction. We are picking up new distribution across both retail and foodservice. We are encouraged by the early results of our new better-for-you lineup, including our SUPERPRETZEL 10-gram protein pretzel and the new Luigi's mini pops with benefits of hydration and antioxidants, which are generating strong velocities for our retail partners. Dogsters has yielded the most incremental distribution and we are also optimistic about the rollout of Dogsters to the pet retail channel which just started in August. Our balance sheet remains in great shape. This quarter, we returned another $25 million of cash to shareholders, including $15 million in dividends and $10 million in share repurchases. I will now hand things over to Shawn who will walk you through the numbers in more detail. Shawn?
Thanks, Daniel, and good morning, everyone. Building on what Daniel covered, our third quarter results reflect continued execution on our transformation initiatives even with some cost headwinds working against us. Foodservice net sales declined $22.9 million or 8.3% to $254.3 million, with about $16 million of the decline associated with anticipated reductions in bakery. We saw modest growth in both pretzels and churros, but this was more than offset by continued softness in cookies and handhelds, consistent with the pattern we saw in the second quarter. Foodservice segment operating income of $28.1 million was modestly above prior year as higher distribution costs mostly offset continued improvements in gross profit. Retail segment net sales increased $1.1 million or 1.7% to $64.9 million. We incurred a $2 million increase in slotting fees in the third quarter to support the rollout of recent innovation. Absent slotting increases, sales growth was 4.8%. Dogsters continues to perform exceptionally well with units up about 40% in the quarter. Retail segment operating income declined $3.5 million, primarily driven by the increase in slotting fees and distribution costs. Frozen beverage segment net sales decreased $6.5 million or 5.8% to $106.7 million. Strong growth in beverage sales of 5.9% was more than offset by lower service and machine sales. Lower service sales were driven by customer insourcing decisions consistent with our fiscal second quarter, while machine sales declines mainly reflect the cyclicality of the machine business. Beverage strength primarily was driven by theater and mass merchandise channels. Convenience channel sales were soft in the quarter. Frozen beverage segment operating income decreased $0.9 million to $22.8 million, as sales decline and higher distribution costs were partly offset by favorable foreign exchange and cost containment initiatives. Consolidated gross margin improved 240 basis points to 35.5% due primarily to plant consolidation savings and mix. Year to date, gross margin has expanded 200 basis points, and we expect gross margin expansion to continue in the fourth quarter. Total operating expenses increased approximately 17.1% or $15.3 million. Prior year reported results included a $9.1 million net gain driven primarily by receipt of insurance proceeds. Selling and marketing expense increased approximately 2.3% or $0.8 million versus the prior year, representing about 8.1% of sales compared to 7.5% in the prior year. Distribution expenses increased $4.9 million and accounted for 11.6% of sales compared to 9.8% in the prior year period, driven by higher freight and fuel costs of approximately $5 million, excluding any offset from fuel surcharges. Administrative expense was approximately flat versus the prior year, and included about $0.6 million of nonrecurring legal charges. Implementation of G&A savings initiatives helped to drive a moderation in administrative expenses. Adjusted operating income was $48.1 million, compared to $53.4 million in the prior year. Adjusted EBITDA was $67.4 million, down 6.4% from $72.0 million last year. The effective tax rate for the quarter was approximately 23.2%, as compared to 27.2% in the prior year. On a reported basis, earnings per diluted share was $1.88, compared to $2.26 last year, with the prior year benefiting from a one-time insurance gain. On an adjusted basis, earnings per share was $1.96 compared to $2.00 a year ago. Our balance sheet remains strong with cash net of debt of approximately $35 million. We had approximately $182 million of borrowing capacity under our revolving credit facility. During the quarter, we generated approximately $48.8 million in operating cash flow and invested about $18.1 million in capital expenditures. We expect to collect approximately $17 million in insurance proceeds in August reflecting the final settlement of the fire-related loss at our Holly Ridge plant which was closed as part of Project Apollo. We repurchased approximately 130 thousand shares of common stock for $10 million during the quarter. On a year-to-date basis, we have returned approximately $120 million to shareholders through the first nine months of fiscal 2026, through dividends and share repurchases. That concludes our prepared remarks, and we are now ready to take your questions. Operator?
Questions and answers
Thank you. At this time, we will conduct a question-and-answer session. As a reminder, to ask a question, you will need to press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Our first question comes from the line of Todd Morrison Brooks of The Benchmark Company. Your line is now open.
Hey. Good morning, guys. Thanks for taking my questions.
Good morning, Todd.
Daniel, you spoke to headwinds diminishing in Q4 in the earnings release. What are you speaking to specifically that eases in Q4, and what is your visibility into that happening?
Morning, Todd. Thanks for the question. Before we start, I just wanted to say a couple things. Our late founder, Gerald Shreiber, might have said this was a quarter to crow about, and I feel like there are a few things I want to crow about just before we get started. I am really proud of the team and what they are accomplishing, especially in this quarter. We started out the year with a play that we called 'raise margins, reduce expenses' to really run at the headwind. This quarter that we are up against last year was a record-breaking quarter, and we ran at it and did pretty well up against it, especially when you consider the fuel and freight picture that we are up against. Without that headwind, we would have beaten last year's EBITDA. In short, Project Apollo is doing exactly what we designed it to do. It protected margins in the quarter despite the pressures that are out there. And we are really seeing some great momentum building in our sales heading into the fourth quarter. Some really exciting things in new pieces of business that we have that are shipping this coming quarter: some great things with pretzels and a QSR, churros in a club store, and really frozen novelties in a lot of different areas, including some great private-label work that we are doing. Lastly, we had a headwind with service, and the team has gone out there and signed a new deal with a big service organization that will get us back on track in the fourth quarter and really start to get back to normal growth as we see 2027. So really a lot of good things happening. Regarding what specifically eases in Q4: we had bakery headwinds that caused some declines as we did SKU rationalization, but we kind of hit the peak of that in Q3 and it starts to taper down as we get to Q4. In Q3, it was approximately 3.5%; in Q4, it is in the 2.5% range. We are really closing that service gap like we just talked about. We have signed the contract with a customer for that piece of business, and that piece of business is coming on board now and will continue to grow into next year. Retail is doing great—you saw that up 1.7% in the quarter. We have been promoting a lot and we are seeing volumes outpace the promotions, which is really exciting. Slotting fees, as we have had to pay for a lot of that great new innovation—and it is great innovation—are starting to diminish as well. And then, last but not least, we are really excited to see what the theater business is starting to do. People have thought that theater business was left for dead, but it has come back really, really strong. Over this past weekend, Spider-Man was released and it was a record breaker. So we are really excited about some of the things that we have going on and are looking forward to Q4 and beyond.
That is great, Daniel. Thanks. And if I can extend that question and start to talk about fiscal 2027: J&J has a long history of generating a certain amount of organic growth, and then there is market-related growth plus or minus around that. If you look at what you are tasking the teams with or what the outlook is, what do you see for the organic growth outlook for the company in 2027, and what are the big drivers that give you visibility into that controllable growth that might be part of that?
Yeah. We definitely see organic growth returning in 2027. As I said earlier, we have got some really good things happening in our core products—in pretzels and churros and frozen novelties. We have talked a little bit about frozen beverage; we think theaters are coming back strong. For 2027, we think the lineup of theaters looks good. I still like the test that we have going on with the IC business and a QSR; I think we will see some positive results that happen in 2027. And then a couple other tests that the team is generating beyond that. Our sales team right now is hitting on all cylinders. So I like what we have going into 2027. We have not released what that number will be, but I absolutely believe we will be back to organic growth, and then I think we will continue to see great results from the innovation that we have had going on and some innovation to come as well.
Okay. Great. Thanks, Daniel.
Our next question comes from the line of Scott Michael Marks of Jefferies. Your line is now open.
Hey, good morning, Daniel and Shawn. Thanks for taking our questions. First thing I wanted to ask about—you talked about the foodservice segment. I think if we exclude the bakery SKU rationalization, sales were still down a little bit. You called out some weakness in cookies and handhelds. Just wondering if you can dive into that a bit—help us understand what is happening with that part of the business and how you are thinking about operational adjustments or changes to help stabilize that part of the portfolio.
Good morning, Scott. We are proud of what the foodservice group is doing as well. It is a big group—about two thirds of our business—and there are a lot of moving parts. The team is doing really well there. When you think about the weaker areas, meaning cookies and handhelds, the cookies weakness is largely an offshoot of buying being down in that area. We have a major customer south of the border that has been a little bit softer this year. We continue to hope that it will come back to its normal self, but it has not yet. The fortunate thing is this is lower margin business, as is the handheld business as well. Most of our handhelds go to a couple big customers where there have been some other products added that have maybe impacted those sales slightly. The way we are going to address that—and the team is doing this now—is to grow the core. We have seen great growth happening. We have a really nice piece of churro business that we will be shipping out in the fourth quarter and it could be backed up by some really strong items in Q1. We have a big pretzel opportunity that will be hitting in the fourth quarter, and it even uses our SUPERPRETZEL brand. I am really excited about that. And then frozen novelties are doing really well, in addition to some great private-label and co-manufacturing work around frozen novelties. That is how we will continue to pull the foodservice back in line. The cookie gap extended from the second quarter; it did improve a bit in the third quarter, but not by quite as much as we were hoping. We have even seen a little improvement here in the fourth quarter, but it has to continue to grow.
Understood. Appreciate the color there. And then next question for me: maybe if we could shift over for a second to talk about Project Apollo. You talked about a higher amount of annualized savings from the plant closure portion. Just wondering if you can help us understand the drivers behind that—why is that coming in ahead of plan and prior guidance? And then how should we be thinking about the other components of Project Apollo as well? Thanks.
Yeah. It is another one of those things. We talked about things to crow about. When you start a project like Apollo, those are big rocks that you are turning over, maybe even boulders that you are picking up and moving. The team has done a tremendous job with that. If you have ever been involved in consolidation or expense savings, those projects are not fun and not easy and require a lot of work. Our team has done a tremendous job with that. Really proud of what it has done. Shawn, do you want to touch on some of those things?
Yeah, sure. To be clear, we raised the plant consolidation component of Apollo from $15 million to $20 million, which takes the total program from $20 million to $25 million. Largely, what we have seen is some of the costs transitioning products have stabilized, and so that is helping to support the higher number. That $20 million annualized is consistent with what we achieved in the third quarter, and I can tell you too that our target did have a bit of conservatism built into it. We feel comfortable now that we have a couple quarters under our belt that the run rate from the third quarter is going to hold for us.
Appreciate it. Thanks for the questions. I'll pass it on.
Our next question comes from the line of Jon Andersen of William Blair. Your line is now open.
Good morning, guys.
Good morning, Jon.
Sticking with the Apollo program for a moment: I think you have always talked about it as a phased-in approach, and you are obviously over-delivering on phase 1—the plant consolidation. I am thinking ahead a little bit. As you look forward, is there a second phase to this that could end up yielding additional benefits? And if so, is there any way for us to think about at least some of the areas you are looking at and maybe benefits and timing at a high level?
Yeah, absolutely. Great question, Jon. Again, I just want to say this one more time: proud of what the teams are doing around Project Apollo, and there is some really good work ahead as well. You saw some of it in this quarter as we talked about G&A expenses and pulling that back in line, and I am excited about what we see there. We will continue to look at areas like the plants and where we are making products and where we can make products in the future to get them closer to points of distribution. We will look at any form of consolidation that can be done there. We are still working on it, and we will be talking about that in the next quarter and trying to identify exactly what that might mean for us in 2027, but the teams have embraced it and are doing a really, really good job. Again, that is not easy work, but they are doing well with it.
Absolutely. You talked about the sales momentum building and that you would expect a return to organic growth on a full year basis in fiscal 2027. Do you think you can grow organically in the fourth quarter of 2026? Or should we be thinking more about these business wins and launches kicking in and having you inflect early in 2027 versus the fourth quarter?
When you think about Q4, we still have some of the planned obsolescence that we are up against, and I think we have talked about that in that 2.5% range. So we are still up against that as we go into Q4. I am not sure that I would identify Q4 as the clear inflection yet. I do think as we get into Q1, with what our line of sight is right now, we have a really good chance of seeing that at the end of this calendar year or Q1 for us going into next year. The pipeline from the sales team is about as strong as I have ever seen. If some of those hit, and if some of the bigger ones hit, I will feel really good about 2027. Of course, there are always headwinds, and so we will be facing those too, but I feel good about what we have going on and I feel good about what the teams are generating right now. They have been working really, really hard. I would look more towards Q1 than probably Q4.
Given the pipeline as you described it being so strong, are there any capacity considerations here? Are you in good shape to service that demand on time and in full, or are there some investments that you might be making or need to make as you think about capacity going forward?
Absolutely. One of the plays we have called for the last couple years is 'grow the core,' and that is where most of this growth is coming from. Those are areas where we had invested already and had capacity to support that type of growth. What we are looking at right now will not require significant additional investments around those areas to get the sales growth that we are looking at.
I know that you went through SKU rationalization this year, which makes a lot of sense to skew rationalize some parts of the bakery business, maybe more commodity oriented. Is there more of that to do? Or maybe bigger or additional moves you might want to make from a portfolio perspective to reorient around your crown jewels or core brands? Or are you happy with the work that has been done and you move into more of a steady state as you get into next year?
It is another really good question. I do not see us at this point in time having any more SKU rationalization or planned obsolescence. We are continuing to assess the portfolio and make sure that what we sell and what we want to sell in the future are good fits for this organization and help us reach those goals, like we did this quarter with a 35.5% gross margin. We have talked about that for a long time, and it was really exciting to see that happen. So we will continue to assess the entire portfolio, but I do not see, at this point in time, any additional SKU rationalization that needs to be done.
Great. Thank you so much, and congrats.
Thank you. This concludes the question-and-answer session. I would now like to turn it back to management for closing remarks.
Great. Thank you very much. Thanks, everyone, for your questions. Stepping back, I think our third quarter results show that the transformation work that we have been doing is holding up. We are protecting margins and profitability even with some top-line and distribution cost pressures working against us. If I had to sum up fiscal 2026, it has really been a year of repositioning the business for the long run. We have stayed disciplined on product development and innovation and really building the right partnerships. I think it sets us up well heading into fiscal 2027. Our balance sheet gives us great room to keep investing in growth while returning cash to shareholders. We remain completely confident in Project Apollo, and we believe that it will continue to pay off. So I want to thank you again for your support, and we look forward to catching up with you next quarter. Thank you very much.
Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.