The Marzetti Company (MZTI) Q1 2027 earnings review
Marzetti's new sauce brand grows, but its profit drops 38%
The Marzetti Company, the maker of salad dressings, dips and frozen garlic bread, saw its profit fall by a third as a summer produce scare and higher trucking bills hit its factories. Sales from businesses it owned a year ago shrank 4% by our math, even as newly acquired barbecue sauce brand Bachan's lifted retail revenue. Chief executive David Ciesinski blamed a cyclospora outbreak in bagged salads, higher diesel rates, and startup costs at its Atlanta plant for a 27% drop in operating profit excluding one-offs.
| Sales from businesses owned a year ago | -4.0% reported sales -2.4% ($481.5M) |
|---|---|
| Gross margin | 23.0% -1.1 percentage points from a year ago |
| Profit per share, excluding one-offs | $1.14 -34.5% from a year ago ($1.74) |
| Cost outlook | Worsened added warning on significantly higher diesel and freight |
⚖️ Verdict: 🔴 Bearish
The story got worse because the company's 12-quarter streak of gross margin expansion broke just as underlying retail volume fell 7% by our math. Last quarter management expected roughly flat first-quarter margins and a 15% operating profit dip, so a 1.1 percentage point margin drop and a 30% reported operating profit fall leave a much deeper hole for the rest of the year. One bright spot: store checkout sales rose 21% for licensed Texas Roadhouse dinner rolls and 11% for Bachan's.
The question now is whether the margin and volume drop was mostly a one-off hit from the salad outbreak or a lasting squeeze from freight inflation and shrinking dressing demand. If the outbreak was the main cause, volumes and factory margins will rebound as salad sales normalize; if freight costs and category decline are the culprits, management will have to cut its full-year targets. Second-quarter retail volume and gross margin will settle it.
🐂 Bull Case
Texas Roadhouse Rolls Keep Growing in Stores
Marzetti sells frozen bread and dinner rolls in grocery stores under its own New York Bakery name and licensed restaurant brands. Chief executive David Ciesinski said consumer demand for Texas Roadhouse dinner rolls stayed strong, with retail checkout sales tracked by research firm Circana rising 21.3% from a year ago. That follows 28.1% growth in the fourth quarter and helps offset weakness in salad dressings.
What to watch: whether management gives a dollar figure for Texas Roadhouse roll sales on the call or in the quarterly filing. A concrete revenue figure would show if the product is big enough to carry the retail division without help from acquisitions.
Dividend Streak Reaches 63 Years
The company paid a quarterly cash dividend of $1.00 per share, up 5.3% from $0.95 a year ago. Even after borrowing $200 million in May to buy barbecue sauce maker Bachan's and absorbing a 37.9% drop in quarterly net income to $29.3 million, earnings of $1.07 per share covered the payout. Diluted share count also edged down 0.8% from a year ago to 27.3 million.
What to watch: the quarterly cash flow statement in the upcoming 10-Q filing, along with the December dividend declaration. Operating cash flow after factory spending will show how much room Marzetti has to raise the payout for a 64th year while paying down its new term loan.
🐻 Bear Case
Gross Margin Streak Ends on Freight and Factory Costs
Marzetti had expanded its gross margin for 12 straight quarters and expected roughly flat margins in the first quarter before expanding them for the full year. Instead, cost of sales — the cost of making and shipping its food — rose 1.1 percentage points of revenue. Reported gross margin fell 1.1 percentage points to 23.0%, and gross margin excluding last year's temporary supply deal dropped 1.6 points.
Ciesinski blamed lower factory volumes, "significantly higher diesel and freight costs; and commissioning costs for the addition of new production capacity at our sauce and dressing facility in Atlanta, Georgia". This cuts against last quarter's message that the Atlanta factory startup was behind the company. Because overhead and marketing expenses also jumped 2.6 points of revenue to 14.4%, operating income excluding one-offs fell 27.4% to $43.9 million.
What to watch: whether management holds its full-year target of 1 percentage point of gross margin expansion on the conference call. Holding that plan would require margins to rise more than 1.5 percentage points over the rest of the year despite higher shipping bills.
Retail Volume Outside Bachan's Keeps Shrinking
Reported sales in the retail division rose 2.0% to $252.7 million, and pounds shipped edged up 0.4%. All of that growth came from buying Bachan's. Ciesinski noted that "The cyclospora outbreak had a significant impact on this quarter’s top and bottom-line results" and cut retail sales by about 4% "due to lower demand for our Retail dressing, dip and crouton products" after a summer parasite recall hit bagged salad mixes.
- Retail sales from businesses owned a year ago: down 5.2% by our math
- Retail volume excluding Bachan's: down 7.1% in pounds shipped by our math
- Cyclospora outbreak impact on retail sales: roughly 4%, worse than the 2.5% management estimated last quarter
Even if the salad recall explains 4 percentage points of the drop, underlying retail volume still shrank by about 3% by our math. That extends a four-quarter losing streak in the core grocery business. While Ciesinski said "the cyclospora impact has moderated in recent weeks", the deeper volume drop shows shoppers are buying fewer Marzetti dressings and dips even beyond the produce scare.
What to watch: second-quarter retail volume excluding Bachan's. If pounds shipped keep falling once the salad outbreak is over, the acquisition is only masking a shrinking core business.
Bachan's Sales Slow From Deal-Close Pace
Marzetti bought Bachan's, a maker of Japanese barbecue sauce, for $400 million in May to speed up its growth. Bulls point to store checkout data from Circana, which showed Bachan's retail sales rose 10.7% this quarter, faster than the 8.7% pace in the June quarter. However, bears worry the brand cannot justify its price tag or carry the company's full-year growth plan.
In its first full quarter under Marzetti, Bachan's added $17.8 million in sales, or about $5.9 million a month by our math. That is slower than the $15.4 million it generated in just two months last quarter ($7.7 million a month by our math). Meanwhile, adding Bachan's operations and $2.4 million of intangible amortization pushed company-wide selling and administrative expenses up 18.7% to $69.3 million, above the 10% to 15% annual pace management projected.
What to watch: Bachan's quarterly sales once Marzetti launches its new marketing campaign in the second quarter. Shipments need to climb back above $22 million a quarter to reach the $100 million annual mark management discussed last quarter.
Risks this quarter didn't answer
Two standing balance-sheet and customer risks received no new numbers in the earnings release and await the quarterly 10-Q filing.
- Customer concentration: Chick-fil-A accounted for 30% of sales and Walmart for 18% last year; the 10-Q footnote will show whether reliance on these two buyers grew.
- Columbus warehouse lease: a 15-year lease with $159 million in fixed payments starts this fiscal year; the 10-Q lease footnote will show when the liability hits the balance sheet.
👓 Other Themes
Foodservice Volume Drops Beyond the Recall
In the foodservice division, which supplies restaurant chains, reported sales fell 6.9% to $228.8 million because a $10.7 million temporary supply deal with Winland Foods ended in March. Excluding that ended contract, sales fell 2.6% and pounds shipped dropped 4.1%. The company estimated the cyclospora salad outbreak cut division sales by about 2%, meaning restaurant volume shrank another 2% on softer diner traffic, cutting segment operating profit 12.6% to $30.4 million.
💲 Other KPIs
Inventories rose 24.0% from a year ago and 5.2% from last quarter to $215.8 million, partly from adding Bachan's stock ahead of holiday promotions. Total debt less cash stood at $179.3 million by our math after May's $200 million acquisition loan, creating $2.8 million in quarterly interest expense versus none a year ago.
Money owed by customers rose 8.4% from a year ago and 4.6% from last quarter to $110.4 million, even though reported sales fell 2.4% from a year ago. Receivables growing faster than revenue ties up working capital and reflects the addition of Bachan's retail accounts.
🔮 Guidance
Unchanged in the release text. Marzetti gives no numbers in its press release outlook, stating only that retail sales will benefit from Bachan's and new items while foodservice relies on "selected quick-service restaurant customers in our mix of national chain restaurant accounts". By our math, hitting the 4% to 6% full-year sales growth management discussed on last quarter's call now requires 7.6% growth over the rest of the year.
Worsened on shipping costs. Alongside "a moderate level of commodity cost inflation, in addition to significantly higher diesel and freight costs", Ciesinski added a new warning on trucking rates that was not in last quarter's release. Management still plans to offset these bills "through inflationary pricing and our cost savings programs as we remain focused on margin improvement". By our math, the prior call target of 4% to 6% operating profit growth now requires 16.0% profit growth over the rest of the year.
❓ Key Questions
Does the full-year profit target still stand after Q1?
Operating income excluding one-offs fell 27.4%, nearly twice the 15% drop management discussed on last quarter's call. Hitting the prior full-year target of 4% to 6% growth now requires 16% profit growth over the rest of the year by our math.
Why did Bachan's monthly shipments slow in the first quarter?
Bachan's added $17.8 million in three months ($5.9 million a month by our math), down from $15.4 million in two months last quarter ($7.7 million a month). Investors need to know how much of the slowdown was seasonal versus distributor inventory destocking.
How big are commissioning costs at the Atlanta factory?
Last quarter management indicated the Atlanta sauce facility was driving foodservice margin gains, but this quarter it cited commissioning costs for new capacity there as a drag on gross margin. How much did those startup costs hurt Q1 profit, and when do they end?
Why did core retail volume drop 7% beyond the recall?
Excluding Bachan's, retail pounds shipped fell 7.1% by our math, while management estimated the cyclospora salad recall reduced retail sales by about 4%. What caused the remaining 3% drop in underlying grocery volume?