Commodity costs weigh on Tasty Q2 profit

by Eric Schroeder
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PHILADELPHIA — Tasty Baking Co., in the second quarter ended June 28, posted net income of $75,000, equal to 1c per share on the common stock, down from $944,000, or 12c per share, in the second quarter last year. Net sales were $44,594,000, up 2% from sales of $43,805,000 in the comparable period in 2007.

The depressed earnings in the second quarter reflected a $2.4 million pre-tax charge related to higher ingredient and packaging costs, resulting in a 5 percentage point contraction in gross margins. Also factoring into the loss was an $800,000 incremental after-tax depreciation expense against the useful life of its Philadelphia baking plant associated with the company’s pending move in 2010.

"In the second quarter of 2008, increasing commodity costs continued to have a significant impact on our financial results," said Charles P. Pizzi, president and chief executive officer. "We were, however, able to mitigate this impact by focusing on cost containment, efficiency improvements, and product pricing actions.

"Specifically, during the quarter we reduced selling, general and administrative expenses by $1 million, or 7.6% compared to the same period a year ago, and continued to improve operational performance at each of our manufacturing facilities. In addition, in the second quarter of 2008 we raised list prices on donuts and pies and made changes to our promotional pricing strategy."

Mr. Pizzi said Tasty is "proceeding as planned" and "remains within budget" in terms of its new bakery project set to be completed in 2010.

Against a 3.4% unit volume decline, an increase of 7.8% in the cost of sales, excluding depreciation, translated into severe pressure on margins.

"Variable manufacturing expense per case in the second quarter of 2008 increased 13.1% versus the comparable period in 2007," Tasty said. "This increase was driven by a $2.4 million increase in ingredient and packaging costs, primarily resulting from higher egg, grain and oil prices. Fixed manufacturing expenses rose 4.3% in the second quarter of 2008 versus the second quarter of 2007. This increase resulted from the $400,000 benefit from a change in the company’s employee benefit plans that began in the second quarter of 2007."

Partly helping offset the higher costs was a cut of $1 million, or 7.6%, in selling, general and administrative expense versus last year.

"While the continued volatility in the commodity market is challenging, we remain committed to the strategy of managing the business to minimize risk," said Paul D. Ridder, senior vice-president and chief financial officer. "Additionally, we continue to evaluate the proper level of pricing and promotion as we attempt to recover profits absorbed by higher ingredient and packaging costs."

Tasty said the remainder of fiscal 2008 is expected to be subject to continued uncertainties and variations. As such, the company withdrew its detailed operating outlook for 2008. Tasty did note that it expects to incur a loss of $1.7 million to $3.2 million in 2008, which will include approximately $3.2 million, after tax, in accelerated depreciation related to the company’s move to Philadelphia in 2010.

For the first six months of fiscal 2008, Tasty sustained a loss of $884,000, which compared with net income of $1,820,000, or 23c per share, in the same period a year ago. Net sales totaled $87,415,000, down from $88,129,000 in the same year-ago period.

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