Lancaster Colony: Priced In – Stock Poised For A Correction

Since early June 2022, Lancaster Colony Corporation (NASDAQ:LANC) has been on a tear, soaring from a little under $117.00 per share on June 10, 2022, to its 52-week high of $214.00 on November 8, 2022, and pulling back to trade as about $200.00 per share as I write.

With that steep of a run for a prolonged period of time, and it trading flat or slightly down since November 8, it looks to be the company is poised for a correction, especially the modest numbers and guidance reported and given in its last earnings report.

Even though the company has been able to offset some of the inflationary input costs by raising prices and lowering costs where it can, I think it’s probably at the top end of price increases, as some customers have stopped buying higher-priced products and have transitioned to lower cost alternative products.

That was anticipated by the company, but it’s still a reality that has to be included in the analysis of LANC.

In this article, we’ll look at the latest numbers put up by the company, the lack of tailwinds in the near term, and what the probable outcome will be in 2023.

Some of the numbers

Revenue in the first fiscal quarter of 2023 was $425.5 million, compared to revenue of $392 million in the first fiscal quarter of 2022.

Revenue from its Retail segment was $223.2 million, down 0.3 percent from the first fiscal quarter of 2022, while revenue from Foodservice was $202.3 million, up 20.3 percent year-over-year.

Excluding advance customer orders from its ERP go-live event starting on July 1, 2022, the company would have had additional revenue in the quarter of $25 million, with approximately $11 million of that in Retail and the other $14 million in Foodservice.

Net income in the reporting period was $37.6 million or $1.36 per diluted share, compared to net income of $30.7 million or $1.11 per diluted share in the first fiscal quarter of 2022.

Gross profit in the quarter was $99.1 million, up $6.7 million or 7.2 percent. Gross profit margin dropped 30 basis points in the reporting period.

As for the increase in gross profit that came from improved pricing net of commodities or PNOC in both of the company’s segments.

At the end of the first fiscal quarter of 2023, the company had cash and cash equivalents of $64 million with no debt.

On an annual basis, the company has raised its dividend for 59 years in a row.

Retail segment

While revenue from its Retail segment was down 0.3 percent at $223.2 million, it could have been worse because of a decline in sales volume, as measured in pounds, being down 15 percent.

The three reasons given for the decline in sales volume were inflationary pricing, the aforementioned ERP go-live event, and the decision to exit some product categories that were less profitable during the fiscal year.

On the positive side, raising pricing in key products partially offset rising cost inputs, although demand elasticity resulted in retail sales volume falling by about seven percent. This shouldn’t be confused with the overall decline in sales volume in retail of 15 percent. In other words, higher prices resulted in lower demand, accounting for seven percent of the 15 percent total drop in sales volume in the Retail segment.

In its second fiscal quarter, LANC expects its expanding licensing program to be beneficial to the Retail segment.

Foodservice segment

Revenue in its Foodservice segment was up 20.3 percent year-over-year. The primary catalyst behind that was raising prices and an increase in volume from a more favorable customer mix in relationship to its national accounts.

Not including the advanced ordering which was pulled forward as a result of its ERP go-live initiative, revenue in Foodservice was down by approximately one percent in the fiscal first quarter of 2023. That aligns with data from NPD CREST that revealed transactions in the restaurant industry were down in the low to mid-single-digit percentage range in the reporting period.

The point is, it doesn’t appear the weaker numbers came from something organically innate to the company; it was related to macroeconomic forces outside its control.

Inflation from input costs will remain a headwind in the quarters immediately ahead, but the boost in prices and actions to lower costs will help offset the impact on the performance of the company.

Another factor raised concerning second quarter costs was the startup costs associated with the launch of production in the new addition to the facility at Horse Cave, Kentucky. A potential positive catalyst for Foodservice in the second fiscal quarter is the expectation that there will be volume growth from its “quick-service restaurant chain customers.” Taken together, it looks like there will be momentum in parts of its two segments, but costs will probably continue lower margin and net income in the next quarter at least, and possibly longer.

Conclusion

The bottom line for me is I think everything is priced into the share price of LANC, and with little in the way of significant, visible tailwinds, it appears the company is probably overbought at this time and is ready to correct.

I don’t own shares in LANC, but if I did and I had a decent cost basis, I would be seriously thinking about taking some profits off the table and wait for a correction to add to or start a new position, if the share price falls to attractive levels, which I think it will.

In my opinion, I don’t really see anything wrong with the company other than a probable slower economic period it will operate in during 2023, where both segments could come under pressure if or when consumers start prioritizing spending.

If the recession gets deeper for longer, and inflation remains high – even if it’s coming down at an incremental pace at this time – I think consumers are going to start cutting back on spending because of the uncertain labor market and the increasing number of workers being laid off or fired.

No matter how the macroeconomic situation plays out, I think the stock has gotten ahead of itself and is due for a hefty pullback. If economic concerns rise and consumer sentiment turns more fearful, the level of the expected correction, according to my thesis, could be deeper than expected.

I think taking some profits off the table and waiting for the correction to get another attractive entry point to start or add to a position is the way to think of LANC under the current market conditions.