Marzetti's sales fell 2.4%. Why did profit drop 38%?

Marzetti's sales fell 2.4% in the September quarter, but net income dropped 38% to $29.3 million. Weaker demand and a larger expense bill cut profit much more than revenue.

The company estimates that the cyclospora outbreak reduced Retail sales by about 4%, as demand weakened for dressings, dips and croutons. Foodservice faced an estimated 2% sales hit. The figures put a scale on a problem management had flagged in August.

Chief Executive Officer David A. Ciesinski said the outbreak's impact had moderated in recent weeks. Retail sales still grew, helped by Bachan's, while company-wide operating profit fell 30% to $41.4 million.

The acquisition supported sales

Bachan's contributed $17.8 million of Retail revenue, helping the segment reach $252.7 million. Marzetti bought the barbecue sauce maker on May 1 and had already reported its contribution to the preceding quarter.

Including Bachan's, Retail pounds shipped increased just 0.4%. The decline excluding the acquired brand shows the pressure on the existing business. Retail operating profit fell to $37.2 million from $50.6 million a year earlier.

Marzetti reported better performance elsewhere, including continued demand for Texas Roadhouse dinner rolls. But the company also faced significantly higher diesel and freight costs, along with costs to bring new production capacity into service at its Atlanta sauce and dressing plant.

The margin comparison matters

Company-wide sales fell 2.4% to $481.5 million. Part of that decline came from the end of a temporary supply contract connected with the Atlanta plant acquisition. That contract had contributed $10.7 million of sales a year earlier, with matching costs and no gross profit.

Removing that contract from the comparison leaves a sales decline of only 0.3%. It also gives a clearer view of the margin squeeze.

Research by Ticker Byline shows a reversal from the previous report. Excluding the expired contract, June-quarter gross margin had improved about 1.6 percentage points from a year earlier. September's margin fell about 1.6 points on the same year-over-year basis, to 23.0% from 24.6%.

Gross profit fell $8 million, while selling and administrative costs increased $10.9 million, including expenses associated with Bachan's. Even after removing acquired-intangible amortization and the prior year's restructuring charge, adjusted operating profit fell 27.4%.

Financing added another charge. Interest expense was $2.8 million, against none a year earlier, as part of the Bachan's purchase was funded with a $200 million term loan.

The next test is demand and costs

For the rest of fiscal 2027, Marzetti expects Bachan's, new products and selected restaurant customers to support sales. It expects pricing and savings programs to offset most or all of the anticipated commodity, diesel and freight pressures.

Operating cash remained positive at $51 million, down from $69.5 million. The Marzetti company profile tracks those cash flows, the acquisition debt and management's margin-improvement plans.