WESTERVILLE, OHIO — A continuation of elevated costs for raw materials, packaging, freight and labor, coupled with restructuring and impairment charges related to the exit of the Bantam Bagels business, dragged down quarterly earnings at Lancaster Colony Corp.
Lancaster Colony in the third quarter ended March 31 sustained a loss of $4.48 million, which compared with income of $28.9 million, equal to $1.05 per share, in the same period a year ago. The most recent quarter included a noncash restructuring and impairment charge of $22.7 million for the Bantam Bagels business.
Net sales, meanwhile, continued to trend upward, climbing 13% to $403.49 million from $357.25 million a year ago.
“Net sales growth in the Retail segment was driven by pricing across the portfolio, continued volume gains for our licensing program and strong sales for our Sister Schubert’s dinner rolls,” David A. Ciesinski, president and chief executive officer, said during a May 5 conference call with analysts. “The 7.4% net sales growth in Retail compares to a robust sales gain of 17.1% in last year’s third quarter. Retail sales volume measured in pounds declined 2%, but comps to strong volume growth of over 12% in the prior year quarter and moreover, reflects the decision to exit select noncore products. Excluding these rationalizations, our third-quarter Retail net sales volume grew 5%.”
Mr. Ciesinski said Lancaster’s licensing program continued to perform well in the quarter, with Buffalo Wild Wings and Chick-fil-A sauces accounting for more than 8 percentage points of Retail net sales growth. On a two-year stack basis for the quarter, retail sales for the company’s licensed sauce platform have more than tripled, growing to $89 million from $29 million, he said. That rapid growth, though, has come at a cost, as the company has faced incremental co-manufacturing cost and margin pressure, he said.
To address the rising costs Lancaster has undertaken “a focused list of discrete actions,” Mr. Ciesinski said. Steps taken in the third quarter included the construction and start up of a sauce capacity expansion project at one of the company’s Columbus, Ohio-based facilities, as well as the opening of a new Columbus-based warehouse location. Lancaster also is increasing the use of its internal manufacturing facilities where its capacity situation allows, he said.
Another significant step taken during the quarter was the decision to exit the Bantam Bagels business, which Lancaster acquired for $34 million in October 2018. At the time of the acquisition, Mr. Ciesinski described New York City-based Bantam Bagels and its frozen mini stuffed bagels and mini stuffed pancakes as “a fast-emerging company that provides us with an entry into the large and growing frozen breakfast category.” Founded in 2013 as a retail shop, Bantam Bagels had an existing relationship with Starbucks, another positive that Mr. Ciesinski believed positioned the business for future expansion.
But less than four years later, based on the financial underperformance of the business with no foreseeable path to profitability, Lancaster made the decision to exit the business after pursuing several strategic alternatives, including a potential sale.
“Early during the pandemic, the foodservice industry was severely impacted by store closures and traffic declines,” Mr. Ciesinski said. “During this period, numerous restaurant operators made choices to streamline their menus for operating efficiencies. And during this period, Bantam Bagels was discontinued at their largest customer precisely for this reason. This discontinuation and the sustained impact of the pandemic changed the economics of the business. Despite investments to support the growth of Bantam Bagels in the retail segment and our best efforts to replace the loss of the major customer in the foodservice segment, we were unable to identify a credible pathway to profitability for the business. Consequently, we made the prudent, but difficult, decision to exit the business.”
Lancaster said it is currently pursuing the sale of the equipment used to produce Bantam Bagels and expects to have fully exited the business by the end of June.In the nine months ended Dec. 31, Lancaster Colony’s net income was $60.54 million, or $2.20 per share, down 45% from $110.61 million, or $4.02 per share. Net sales were $1.22 billion, up 13% from $1.08 billion.