On February 2nd 2006 John B. Sanfilippo (JBSS) reported second quarter results. For the quarter JBSS reported a small loss of $64,000 or $0.01 per share compared to net income of $6.4 million or $0.60 per share a year earlier. Net sales increased to $191.1 million from sales of approximately $183.0 million in the second quarter of fiscal 2005. The net sales increase during the current quarter was attributable to higher average selling prices although unit volume declined by approximately 9.8 million pounds or 11.6%. Clearly, JBSS continues to be impacted by high tree nut costs which results in lower gross margins to the company. Although the company has been able to institute some price increases to its customers, they have not been enough to offset the substantial increase in tree nut prices the last couple of years.

The good news is that nut prices, particularly cashews, pecans and peanuts, are beginning to experience price declines. Quoting CEO Jasper Sanfilippo, “We now see signs that the period of historically high tree nut costs is nearing an end as nut markets react to increasing supply and the current relatively flat consumption trend”. As nut prices decline, and JBSS works off its higher cost inventories, unit volumes and margins should improve. Further, the declining cost of cashews and peanuts, which are key items in private label snack nuts, should generate higher margins for retailers and lead to increased promotional activity in the latter half of the calendar year.

In the meantime, shares of JBSS remain attractively priced. The stock is trading at approximately ten times next year’s expected earnings of $1.40 per share. In addition, JBSS trades at a 22% discount to its book value of $18.45. Included in book value is a plant and 85 acres of land that JBSS is currently in the process of selling. Given that these assets are recorded at historical cost, they are likely worth more than their stated book value. In addition, we feel JBSS is selling significantly below the price it could fetch if it were either taken private or sold to a strategic buyer. For example, JBSS’s Fisher brand of packaged nuts represents only 20% of total company sales. Yet, looking at comparable publicly traded consumer goods companies, the unit could probably be sold for 1.5 times sales in an auction. At 1.5 times sales, the Fisher brand would be worth close to $150 million or roughly the entire market capitalization of JBSS. In other words, at today’s price, investors who purchase shares in JBSS are paying for Fisher, and getting the rest of the company for free.

September 8, 2006

On September 7, 2006 John B. Sanfilippo (JBSS) reported fiscal fourth quarter and year end results. Net loss for the current quarter was approximately $7.3 million, or $.69 per share diluted, compared to net income of approximately $3.5 million, or $.32 per share diluted, for the fourth quarter of fiscal 2005. For the year, the net loss was approximately $14.4 million, or $1.36 per share, compared to net income of approximately $14.5 million, or $1.35 per share diluted, for 2005.

It is important to note that JBSS’s results do not yet fully reflect current lower tree nut prices. In other words, JBSS is still cycling through inventory which was purchased at a time when nut prices were at record highs. Since purchases of raw materials are typically done once a year to coincide with the tree nut harvest, it will probably take another quarter or two before the effect of lower cost inventory begins to positively affect the bottom line. As patient investors, we feel a more useful approach is to look at JBSS’s earnings in an environment of normal tree nut prices. In effect, we are taking the Wayne Gretzky approach, referring to when he famously remarked “I skate to where the puck is going to be, not to where it has been.”

In the meantime, shares of JBSS have traded down to about $10 since the company reported its quarterly results. At this price, we feel the shares are simply dirt cheap. The stock sells for just 53% of its $18.54 book value, a figure which likely understates the value of the company’s real estate and does not account for the value of the Fisher brand. Further, if JBSS can return its net margins to its five year average of around 2.5% it could earn as much as $1.35 per share based on fiscal 2006 sales. We believe that sales will probably improve in 2007. Increased promotional activity from retailers, and the introduction of new products such as Fisher Fusion, a line of flavored almonds, could push sales through $600 million in 2007. If JBSS can increase sales, and improve its margins back to historic levels, we believe that JBSS should strengthen significantly.

January 26, 2007

On December 15th, 2006 John B. Sanfilippo (JBSS) reported fiscal 2007 first quarter results which included a loss of approximately $4.8 million, or $0.41 per share. It is important to note, however, that JBSS’s past year’s results reflect the impact of higher tree nut prices, particularly almonds, which resulted in lower than normal gross margins. Fortunately, we are now in a new crop year. Tree nut prices have declined considerably and inventories have returned to more reasonable levels.

The Company has also announced that it will no longer purchase almonds directly from growers and will discontinue its almond handling operations in Gustine, California. We feel this was a good management decision as it will reduce the commodity risk that had a significant negative impact on fiscal 2006 results. Moreover, it will also reduce labour costs and free up working capital requirements. In turn, the Company can use this increased liquidity to pay down debt, repurchase shares, purchase other nut types or increase its spending on product research and development.

In the meantime, shares of JBSS have rallied from their September low of $9.78 and now trade at around $13.20 per share. Nevertheless, we think the shares still offer meaningful upside. For instance, JBSS currently trades at a 20% discount to its $16.56 book value, a figure that likely understates the value of its real estate and does not account for the value of its Fisher brand. In addition, its shares sell at an attractive multiple to our estimate of future earnings.

We calculate that if JBSS can return its net margin to its five year average of around 2.5% it could eventually earn as much as $1.35 per share based on fiscal 2006 sales. In addition, we believe that gross sales should improve in 2007 through increased promotional activity from retailers, as well as the introduction of new products such as Fisher Fusion, a line of flavored almonds. We believe these improvements could push sales through $600 million and restore JBSS’s net margin to historic levels. Ultimately this could be the necessary catalyst to propel JBSS shares to previous cycle highs.

February 2, 2007

This morning, February 2nd 2006, John B. Sanfilippo (JBSS) reported much improved second quarter results. For the quarter, the Company reported a profit of $1.2 million or $0.12 per share versus a loss a year ago. Although net sales decreased from $191.1 million to $177.7 million, gross profit margin increased from 8.4% to 10.8% as a result of lower nut acquisition costs. According to CEO Jeffrey T. Sanfilippo, "The Company has cycled through its negative margin almond contracts, and gross profit margin on December almond sales improved significantly in comparison to gross profit margin on almonds sales made earlier in the second quarter”.

During the high tree nut price environment of the last two years, JBSS had to adopt a somewhat defensive strategy. The Company had to keep a careful watch on its operating costs as well as debt and cash flow levels. For instance, in addition to overseeing the building of the Company’s new $100 million headquarters in Eglin, Indiana, JBSS executives spent a significant amount of time working with their bankers and auditors in compliance with Sarbanes Oxley regulation. However, with many of the administrative and regulatory hurdles now mostly behind it, management can now focus its attention on growing the top line.

Although shares of JBSS have rallied over 50% from their September low of $9.8l, we feel there is still room for the shares to improve. At around $15 a share, JBSS still trades at a 10% discount to its $16.56 book value. In addition, JBSS could show meaningful earnings improvement in fiscal 2007 and 2008. We calculate that if JBSS can return its net margin to its five year average of 2.5% it could eventually earn as much as $1.35 per share. More importantly, the company plans to introduce another six to nine new products in the next 12 months which could propel sales through $600 million by fiscal 2008.

February 20, 2009

John B. Sanfilippo (JBSS) recently announced second quarter and first half results for its 2009 fiscal year.  After struggling with rising nut prices for several years, the Company seems to have finally worked through higher cost inventories.  In the second quarter of fiscal 2009, net sales increased slightly to $177.8 million from $177.0 million a year ago.  On a year to date basis, net sales increased to $312.6 million from $309.8 million in the comparable period for fiscal 2008.  Importantly, the gross margin increased to 13.8% in the second quarter and 12.4% in the first half of fiscal 2009 compared to 13.2% and 11.3% respectively in fiscal 2008.  On the back of the margin improvements, net income for the current quarter reached $5.8 million or $0.55 per diluted share compared to $3.5 million or $0.33 per diluted share.  For the first six months of fiscal 2009, reported net earnings were $0.51 per diluted share compared to $0.01 per diluted share in the first half of fiscal 2008.

In the news release, management indicated that an improvement in efficiency stemming from consolidating the Chicago area operations at the Company’s Elgin facility was one of the key drivers of the margin improvements.  Looking forward, management declared that their focus would now be on volume improvements.  Since the start of the year, the Company has been awarded significant private label business, which is estimated to add as much as $50 million in fiscal 2010.  Because revenue has generally been in decline since fiscal 2006, this contract win is important in regaining sales momentum.

John B. Sanfilippo should be a simple story; it is a company that processes and markets nuts.  However, the shares have been under pressure since peaking late 2003 to early 2004 due to the Atkins and South Beach diet crazes.  Other than this spike, the stock has generally traded at a discount to its book value, currently $15.40, and has traded at a discount to its peers.  At approximately 0.4 times book value, we believe that it is up to management to improve the Company’s operations, financial results and valuation.

Consolidating the Company’s facilities in Elgin was a good tangible first step.  Continuing along, management has a list of “strategic accomplishments” in the Company’s AGM presentation that included refinancing the credit facility, reducing raw and finished goods inventories, launching over 190 new items, realigning the sales force, realizing price increases and successfully winning new private label business through customer development.  This progress must now translate into improving financial performance.  As a final thought, we believe that instituting an active share buyback program or a dividend would go a long way to improving the Company’s valuation in the public market.

August 21, 2009

John B. Sanfilippo (JBSS) has just reported financial and operating results for fiscal 2009, ended June 25, 2009.  After losing money for the past three fiscal years, JBSS has finally returned to profitability.  Net income for 2009 was $6.9 million or $0.65 per fully diluted share compared to a net loss of $6.0 million or $0.56 per fully diluted share for fiscal 2008.  Note that the current fiscal year included an unusual pre-tax charge of $1.7 million related to a pistachio recall and an unusual gain of $0.3 million related to the release of an income tax valuation allowance.  Even excluding the unusual charges and gains, these results were very positive.

For the year, net sales increased 2.2% to $553.8 million despite a 1.8% decline in total pounds of all products shipped to customers.  Management broke out the sales mix in the press release, but essentially the decline in pounds sold related to lower sales of peanuts in the industrial channel to other peanut shellers and peanut oil processors.  The gross profit margin increased to 13.1% in fiscal 2009 from 12.2% of sales in fiscal 2008.  Management stated that the improvement came from a “significant” improvement in gross profit margins on sales of walnuts and almonds and improved manufacturing efficiencies in the Elgin facility.

By improving profitability and squeezing working capital, management was able to increase net cash provided by operating activities by 47% to $43.4 million.  Capital spending was curtailed, which allowed management to reduce interest bearing debt by $38.6 million or 29.1% over the course of the year.  In the press release, Mr. Sanfilippo said, “we are committed to making additional changes in our Company to generate growth and to further improve operating results”.  A five-year strategic plan has been approved by the Company’s Board of Directors, which may include acquisitions, joint ventures or other types of strategic alliances.

In response to improving financial results, the shares have rallied approximately 165% from the 52-week low of $4.01, reached on April 22, 2009.  However, at yesterday’s closing price of $10.48, the stock still trades well below the Company’s book value of about $15.60 per share.  We believe that management has put the Company back on track and we will look for additional positive catalysts over the next 12 to 18 months.

November 27, 2009

After a wild ride over the past four years that saw the shares of John B. Sanfilippo & Son “round-trip” from approximately $16 per share to a 52-week low of $4.01 and back again, we have sold our entire position for a small profit.

Over the course of our holding period, JBSS had struggled with the unfortunate fallout of the Atkins diet craze: rising nut input costs that couldn’t be passed along to consumers.  The Company reported losses for three consecutive years but finally returned to profitability in fiscal 2009, ended June 25, 2009.  Management had worked extremely hard to eliminate high cost inventories, align nut purchasing and selling activities, consolidate facilities and improve manufacturing efficiencies at the Elgin facility.  Cash from operations recovered and capital expenditures were slashed, which allowed the Company to reduce debt by 29% during fiscal 2009.

However, the losses had eroded book value from $18.54 at the end of fiscal 2005 to $14.92 at the end of fiscal 2008.  Thankfully, with the return of profitability, book value has rebounded to $16.04 and the shares have quadrupled off the lows.  While the share price may trend higher, the stock trading is very thin and quite volatile.  If we employ a target P/BV multiple of 1.0 times, historically where the stock tended to peak excluding the Atkins mania, we believe that the shares are fairly valued today.