Lancaster Colony Earnings Call Highlights Profitable Growth

Lancaster Colony ((MZTI)) has held its Q2 earnings call. Read on for the main highlights of the call.

Lancaster Colony Earnings Call Signals Confident Growth Despite Volume Headwinds

Lancaster Colony’s latest earnings call painted a broadly upbeat picture, emphasizing record profitability, disciplined cost control, and continued shareholder returns, even as reported revenue growth remained modest and volumes softened in parts of the business. Management highlighted margin expansion, strong EPS growth, and robust brand performance, while acknowledging temporary drags from a tough comparison period, core volume/mix pressures, rising SG&A, and one-time restructuring charges. The announced $400 million acquisition of fast-growing sauce brand Bachan’s was positioned as a strategic, margin-accretive move that should support both top-line and profit growth, albeit with the usual integration and execution risks.

Steady Top Line: Modest Growth Once Temporary Items Are Stripped Out

Consolidated net sales for the quarter rose 1.7% to $518.0 million, but this headline figure was flattered by $8.2 million in non-core sales tied to a temporary supply agreement. Excluding these TSA-related sales, adjusted net sales were essentially flat, up just 0.1% at $510.0 million. The company stressed that these TSA revenues contributed little to profitability and will roll off by the quarter ending March 31, 2026, underscoring that underlying momentum is more about mix, pricing, and category strength than sheer volume growth in the near term.

Record Gross Profit and Expanding Margins Support the Investment Case

Lancaster Colony delivered a second-quarter record gross profit of $137.3 million, up 3.4% year over year, while gross margin expanded by 40 basis points. On an adjusted basis, excluding TSA sales, gross margin improvement was even stronger at 80 basis points. This margin expansion came from favorable pricing, mix, and productivity initiatives, indicating that the company’s strategy to leverage scale and value-engineer its supply chain is working. Even with modest revenue growth, this profitability improvement underpins the company’s ability to reinvest and return capital to shareholders.

EPS Jumps Over 20% as Profitability Improves

Diluted earnings per share climbed 20.8% to $2.15, an increase of $0.37 versus the prior year. Management attributed the EPS strength to improved operating performance and favorable comparisons, noting that the year-ago period included a pension settlement charge. While operating income was slightly lower on a reported basis due to one-time items, the strong EPS outcome highlights the combined effect of margin gains, disciplined financial management, and absence of prior-year drag factors.

Flagship Brands Gain Share and Drive Category Strength

The call underscored robust performance across Lancaster’s key retail brands, which continue to gain consumer traction and market share. New York Bakery frozen garlic bread grew sales 8.4%, lifting its share by 300 basis points to 44.6%. Sister Schubert’s and Texas Roadhouse dinner rolls combined for 7.1% sales growth, pushing their category share to a dominant 60.8% (up 40 basis points). Chick-fil-A sauces advanced 6.7% with a modest share gain, while Marzetti dips edged up 0.3% in sales but grabbed a hefty 130 basis points of share to reach 75.5%. Overall scanner sales for the portfolio rose 2.3% over 13 weeks, illustrating resilient consumer demand and pricing power in core categories.

Foodservice Shows Resilience Despite Slight Volume Softness

In Foodservice, adjusted net sales (excluding TSA) increased 1.6%, driven by strength with national accounts and branded foodservice offerings. This growth came even as pounds shipped declined 0.4%, indicating some volume softness but also highlighting successful pricing and mix management. The segment’s ability to post growth in dollars while volumes dip suggests Lancaster is successfully focusing on higher-value, strategic accounts and products—a positive indicator for profitability, though investors will watch volume trends closely.

Robust Cash Generation Fuels Dividends and Buybacks

The company continued to demonstrate strong financial discipline and balance sheet strength. Year-to-date operating cash flow rose by $30.6 million, or 24%, underscoring the cash-generative nature of the business. Lancaster Colony remains debt-free and sits on more than $201 million in cash. The board approved a quarterly dividend of $1.00 per share, a 5% increase and the 63rd consecutive year of dividend raises—placing the company firmly in “dividend aristocrat” territory. In addition, Lancaster repurchased $20.1 million of its own stock during the quarter, signaling confidence in the intrinsic value of its shares.

Ongoing Investment in Capacity and Efficiency

Capital allocation extends beyond shareholder returns, with continued investment in the company’s manufacturing base. Property additions in the quarter totaled $17.7 million, and management set full-year fiscal 2026 capital expenditure guidance at $75–$85 million. These funds will support manufacturing improvements and the integration of the acquired Atlanta facility, aimed at improving efficiency, supporting growth, and bringing more production in-house over time. This capex profile reflects a balance between maintaining a strong balance sheet and positioning the company for long-term operational gains.

Strategic Bachan’s Acquisition Targets Growth and Margin Upside

A key highlight of the call was Lancaster Colony’s definitive agreement to acquire Bachan’s, a rapidly growing, premium Japanese American barbecue sauce brand, for approximately $400 million in cash. Bachan’s is expected to generate around $87 million in sales in 2025, representing roughly 48% growth from 2022 to 2025. Management characterized the deal as margin-accretive and anticipates that it will be accretive to both top-line growth and gross margins as soon as year one. The company sees meaningful supply-chain synergies and cross-channel expansion opportunities as it brings some currently co-packed production into its own facilities and leverages its distribution footprint across retail and foodservice channels.

Retail Sales Dip Against Tough Comparisons but Rebound Expected

The retail segment saw a modest 1.1% decline in net sales versus a strong prior-year quarter that had grown 6.3%. Management pointed to softer demand during the U.S. government shutdown period as a contributing factor to the shortfall, suggesting a temporary macro drag rather than a structural shift in consumer behavior. Despite this quarter’s decline, the company still expects adjusted retail sales to return to low single-digit growth in the back half of the fiscal year, supported by strong brand health and category share gains.

Volume and Mix Still a Drag on Reported Growth

Despite the positive profit narrative, Lancaster Colony acknowledged core volume and product mix as a meaningful headwind, detracting about 130 basis points from consolidated revenue growth. In Foodservice, the 0.4% decline in pounds shipped reinforced the message that parts of the portfolio are experiencing volume softness. While pricing and mix have offset these pressures to some extent, sustained volume declines could become a concern if consumer or operator demand weakens further. Management’s strategy appears focused on shifting toward higher-value segments and leveraging brand strength, but investors will monitor whether volumes stabilize.

Temporary Supply Agreement Sales Set to Roll Off

A notable factor in this quarter’s reported numbers is the $8.2 million of sales from a temporary supply agreement with WynnWin Foods, which added about 160 basis points to reported net sales growth but did not meaningfully contribute to gross profit. These TSA sales are expected to conclude during the quarter ending March 31, 2026. The coming roll-off means future reported revenue growth will be more reflective of the core business, and investors should focus on adjusted metrics and underlying trends rather than headline growth boosted by non-recurring agreements.

Higher SG&A and One-Time Charges Weigh on Operating Income

Selling, general, and administrative expenses increased $3.3 million, or 5.8%, largely due to stepped-up marketing investments behind key brands. While this spending pressured near-term margins, management framed it as strategic, supporting long-term brand equity and growth. In addition, the company recorded $1.7 million in restructuring and impairment charges, including a non-cash impairment on certain foodservice manufacturing equipment and costs tied to the planned closure of a sauce and dressing facility. Together, these factors contributed to a $0.5 million decline in reported operating income, with adjusted operating income (excluding these items and prior-year acquisition costs) down $0.4 million.

Operating Income Slightly Lower Despite Strong EPS

Consolidated operating income softened modestly, reflecting the combined effects of higher SG&A, restructuring and impairment charges, and an unfavorable mix of non-core TSA sales. While this contrasts with the strong EPS growth and robust gross margin expansion, it underscores that Lancaster Colony is still balancing investment and restructuring activity against near-term earnings. The slight decline in adjusted operating income suggests that much of the EPS improvement came from gross margin gains and cycling past prior-year charges, rather than pure operating leverage, which is something investors will track as the company executes its growth and efficiency plans.

Managing Input Cost Inflation and Commodity Risk

Management acknowledged continuing exposure to input cost inflation and commodity volatility but characterized the near-term outlook as “modest” inflation. The company plans to counter these pressures through contractual pricing mechanisms with customers and ongoing supply-chain productivity and value-engineering initiatives. While this approach has supported recent margin expansion, it also introduces risk if commodity costs accelerate faster than the company can adjust pricing or capture efficiency gains. Still, Lancaster’s track record of margin improvement suggests it has tools in place to manage this headwind.

Integration and Capital Deployment Risks Around Bachan’s

The $400 million cash acquisition of Bachan’s represents a sizable deployment of Lancaster Colony’s balance sheet, consuming a material portion of its cash hoard. While the deal is expected to be accretive to growth and margins, management acknowledged typical integration risks, including the need to transition some co-packed production into its own facilities in a staged and disciplined manner. Balancing this integration work with ongoing capex and core operations will be critical to realizing the promised synergies and maintaining the company’s historically conservative financial posture.

Forward-Looking Guidance: Modest Growth, Tight Cost Control, and Strategic Expansion

Looking ahead, management forecasts fiscal 2026 capital expenditures in the range of $75–$85 million, emphasizing continued investment in manufacturing improvements and capacity, including support for the newly acquired Atlanta facility and, over time, Bachan’s production needs. The estimated effective tax rate for the remainder of the fiscal year is around 23%, roughly in line with the 22.6% reported in the quarter. Retail is expected to deliver low single-digit volume and revenue growth in the second half, with performance fairly even between the two remaining quarters, while Foodservice is projected to continue growing with select national accounts. Management anticipates only modest input-cost inflation, which it plans to offset with contractual pricing actions and productivity programs. The Bachan’s acquisition is expected to be accretive to both top-line growth and gross margins in its first year under Lancaster ownership, with supply-chain synergies building over time. Capital allocation priorities remain focused on maintaining the $1.00 quarterly dividend (recently increased by 5%), selective share repurchases in a more “attritional” posture after the acquisition, and using the company’s debt-free balance sheet and strong cash position to fund disciplined growth.

In closing, Lancaster Colony’s earnings call presented a company leaning into its strengths: powerful brands, disciplined cost control, and a fortress balance sheet, while candidly acknowledging volume softness, higher SG&A, and integration risk around a major acquisition. Record gross profit, expanding margins, and double-digit EPS growth support a constructive narrative, and the Bachan’s deal injects a compelling new growth engine into the portfolio. For investors, the story remains one of steady, shareholder-friendly execution with manageable headwinds and clear strategic priorities aimed at sustaining profitable growth over the long term.