Lancaster Colony reports a poor Q3, but it has good problems
Lancaster Colony reported poor earnings in Q3 of 2022. Sales increased about 13% for the quarter, but gross profit declined by $22 million. The Ohio-based company, most known for its Marzetti salad dressing brand, faced a perfect storm of negative headwinds. Rampant commodity inflation, combined with a reliance on co-brands and co-packing, devastated the company’s margins. The operating margin for the quarter was about 3%, down from 10% the previous year. “Our third quarter financial performance fell short of our expectations,” CEO Dave Ciesinski told investors, “We have the action plans underway to help us overcome the many challenges of the current operating environment.”
Marzetti isn’t unique in facing high commodity costs. It is unique in that it’s been severely impacted by Russia’s invasion of Ukraine. Soybean oil, a key component in salad dressing, reached its highest price ever. The US dominates the soybean oil market, but sunflower oil shortages (Ukraine is a major player), have sent others scrambling for substitutes. “The soybean oil increase drove approximately half of our commodity cost inflation,” CFO Thomas Pigott said.
Marzetti’s licensing platform boosted sales while destroying margin. Lancaster develops, produces and markets a variety of licensed sauces for Olive Garden and Chic-Fil-A. Sales for the platform have tripped in the past two years-from $29 million to $89 million. Marzetti pays the brand partners a royalty on each item, and incredible sales require management to utilize co-manufacturers to meet demand. The company should be able to migrate from the co-manufacturer model this summer, as a planned line extension is scheduled to complete this past June.
Margin should recover in Q4, as the company experiences benefits from the new production line and price increases take effect. Management is also looking to potentially reformulate entire products to combat inflation.
But given the nature of this inflation that we’re seeing, particularly around things like grains and oils, we’re finding that it’s increasingly…