Snack food company Utz Brands (NYSE:UTZ) reported results in line with analysts' expectations in Q3 FY2023, with revenue up 2.5% year on year to $371.9 million. Turning to EPS, Utz made a GAAP profit of $0.19 per share, improving from its loss of $0.01 per share in the same quarter last year.
Utz (UTZ) Q3 FY2023 Highlights:
- Revenue: $371.9 million vs analyst estimates of $370.9 million (small beat)
- EPS: $0.19 vs analyst estimates of $0.07 ($0.12 beat)
- Lowered full year guidance: "total net sales growth of 2% to 3% (previously 3% to 5%) and Organic Net Sales growth of 3% to 4% (previously 4% to 6%)"
- Free Cash Flow of $37.9 million is up from -$12.12 million in the previous quarter
- Gross Margin (GAAP): 32.1%, up from 31.5% in the same quarter last year
- Organic Revenue was up 3.1% year on year (beat vs. expectations of up 2.2% year on year)
- Sales Volumes were down 0.6% year on year (miss vs. expectations of down 0.2% year on year)
Tracing its roots back to 1921 when Bill and Salie Utz began making potato chips in their kitchen, Utz Brands (NYSE:UTZ) offers salty snacks such as potato chips, tortilla chips, pretzels, cheese snacks, and ready-to-eat popcorn, among others.
In the century-plus after its founding, the company has grown through organic expansion of its portfolio as well as major acquisitions. Notable deals include the 2016 purchase of Golden Flake and the acquisition of Conagra Snacks in 2020.
Today, Utz goes to market with the Utz, Zapp’s, Golden Flake, Boulder Canyon, and other brand names. The company differentiates itself from other snack manufacturers by committing to use real ingredients and avoiding artificial preservatives.
It’s hard to pinpoint the core Utz customer because its product portfolio is so broad. If you don’t like chips, maybe you like pretzels. If pretzels aren’t your thing, there’s popcorn or cheese snacks. Suffice to say, though, that the core customer is likely someone who does the grocery shopping for his or her household and values proven brands.
The company’s products add convenience to everyday life, and they are also convenient to find. Ubiquitous retailers such as supermarkets, mass merchants, drug stores, and specialty stores sell Utz products.
Packaged Food
As America industrialized and moved away from an agricultural economy, people faced more demands on their time. Packaged foods emerged as a solution offering convenience to the evolving American family, whether it be canned goods, prepared meals, or snacks. Today, Americans seek brands that are high in quality, reliable, and reasonably priced. Furthermore, there's a growing emphasis on health-conscious and sustainable food options. Packaged food stocks are considered resilient investments. People always need to eat, so these companies can enjoy consistent demand as long as they stay on top of changing consumer preferences. The industry spans from multinational corporations to smaller specialized firms and is subject to food safety and labeling regulations.
Competitors in salty snacks include PepsiCo (NASDAQ:PEP), Nestle (SWX:NESN), and Mondelez (NASDAQ:MDLZ).Sales Growth
Utz is larger than most consumer staples companies and benefits from economies of scale, giving it an edge over its smaller competitors.
As you can see below, the company's annualized revenue growth rate of 16.1% over the last three years was excellent despite selling a similar number of units each year. We'll explore what this means in the "Volume Growth" section.
This quarter, Utz grew its revenue by 2.5% year on year, in line with Wall Street's estimates. Looking ahead, analysts expect sales to grow 4.2% over the next 12 months.
Volume Growth
Revenue growth can be broken down into changes in price and volume (the number of units sold). While both are important, volume is the lifeblood of a successful staples business as there’s a ceiling to what consumers will pay for everyday goods; they can always trade down to non-branded products if the branded versions are too expensive.
To analyze whether Utz generated its growth from changes in price or volume, we can compare its volume growth to its organic revenue growth, which excludes non-fundamental impacts on company financials like mergers and currency fluctuations.
Over the last two years, Utz's quarterly sales volumes have, on average, stayed about the same. This stability is normal as the quantity demanded for consumer staples products typically doesn't see much volatility. The company's flat volumes also indicate its average organic revenue growth of 10.2% was generated from price increases. 
In Utz's Q3 2023, year on year sales volumes were flat. This result was a well-appreciated turnaround from the 2.1% year-on-year decline it posted 12 months ago, showing the company is heading in the right direction.
Gross Margin & Pricing Power
Gross profit margins tell us how much money a company gets to keep after paying for the direct costs of the goods it sells.
Utz's gross profit margin came in at 32.1% this quarter. in line with the same quarter last year. That means for every $1 in revenue, $0.68 went towards paying for raw materials, production of goods, and distribution expenses. 
Utz's unit economics are higher than the typical consumer staples company, giving it the flexibility to invest in areas such as marketing and talent to reach more consumers. As you can see above, it's averaged a decent 31.3% gross margin over the last eight quarters. Its margin has also been trending up over the last 12 months, averaging 1.9% year-on-year increases each quarter. If this trend continues, it could suggest a less competitive environment where the company has better pricing power and more favorable input costs (such as raw materials).
Operating Margin
Operating margin is a key profitability metric for companies because it accounts for all expenses enabling a business to operate smoothly, including marketing and advertising, IT systems, wages, and other administrative costs.
This quarter, Utz generated an operating profit margin of 1.4%, down 1.8 percentage points year on year. Conversely, the company's gross margin actually increased, so we can assume the reduction was driven by lower utilization of assets and a step up in discretionary activities such as corporate overhead and advertising.
Zooming out, Utz was roughly breakeven when averaging the last two years of quarterly operating profits, weak for a consumer staples business. However, Utz's margin has improved by 1.9 percentage points on average each year, showing the company is heading in the right direction.EPS
These days, some companies issue new shares like there's no tomorrow. That's why we like to track earnings per share (EPS) because it accounts for shareholder dilution and share buybacks.
In Q3, Utz reported EPS at $0.19, up from negative $0.01 in the same quarter a year ago. This print easily cleared Wall Street's estimates, and shareholders should be content with the results.
Between FY2020 and FY2023, Utz's adjusted diluted EPS flipped from negative to positive. This is certainly a positive for the business and implies that consumer preferences are shifting in favor of the company.
Over the next 12 months, however, Wall Street is projecting year-on-year declines in EPS.
Cash Is King
Although earnings are undoubtedly valuable for assessing company performance, we believe cash is king because you can't use accounting profits to pay the bills.
Utz's free cash flow came in at $37.9 million in Q3, up 46.3% year on year. This result represents a 10.2% margin.
While Utz posted positive free cash flow this quarter, the broader story hasn't been so clean. Over the last two years, Utz's demanding reinvestment strategy has consumed many company resources. Its free cash flow margin has averaged negative 0.2%, weak for a consumer staples business. However, its margin has averaged year-on-year increases of 3.6 percentage points, showing the company is at least improving.
Return on Invested Capital (ROIC)
We like to track a company's long-term return on invested capital (ROIC) in addition to its recent results because it gives a big-picture view of a business's past performance. It also sheds light on its management team's decision-making prowess and is a helpful tool for benchmarking against peers.
The quarter's results were generally fine, but the company's lowering of its full year sales outlook was a key negative.
Key Takeaways from Utz's Q3 Results
Sporting a market capitalization of $1.05 billion, Utz is among smaller companies, but its more than $60.09 million in cash on hand and positive free cash flow over the last 12 months puts it in an attractive position to invest in growth.
We were impressed by how significantly Utz blew past analysts' EPS expectations this quarter. That stood out as a positive in these results. On the other hand, its operating margin missed analysts' expectations and its gross margin missed Wall Street's estimates. Overall, this was a mixed quarter for Utz. The stock is up 1.5% after reporting and currently trades at $13.13 per share.
Is Now The Time?
Utz may have had a tough quarter, but investors should also consider its valuation and business qualities when assessing the investment opportunity.
We have other favorites, but we understand the arguments that Utz isn't a bad business. First off, its revenue growth has been impressive over the last three years. And while its projected EPS for the next year is lacking, its stellar ROIC suggests it has been a well-run company historically.
Utz's price-to-earnings ratio based on the next 12 months is 20.9x. We don't really see a big opportunity in the stock at the moment, but in the end, beauty is in the eye of the beholder. If you like Utz, it seems to be trading at a reasonable price.
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