Lancaster Colony (LANC)

Specialty food company Lancaster Colony (NASDAQ:LANC) fell short of the market’s revenue expectations in Q1 CY2025, with sales falling 2.9% year on year to $457.8 million. Its GAAP profit of $0.95 per share was 39.8% below analysts’ consensus estimates.

Company Overview

Known for its frozen garlic bread and Parkerhouse rolls, Lancaster Colony (NASDAQ:LANC) sells bread, dressing, and dips to the retail and food service channels.

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 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 specialty foods include Treehouse Foods (NYSE:THS), Flowers Foods (NYSE:FLO), and Clorox (NYSE;CLX), which owns the Hidden Valley dressing brand.

A company’s long-term performance is an indicator of its overall quality. Even a bad business can shine for one or two quarters, but a top-tier one grows for years.

With $1.89 billion in revenue over the past 12 months, Lancaster Colony is a small consumer staples company, which sometimes brings disadvantages compared to larger competitors benefiting from economies of scale and negotiating leverage with retailers.

As you can see below, Lancaster Colony’s sales grew at a tepid 5.4% compounded annual growth rate over the last three years, but to its credit, consumers bought more of its products.

This quarter, Lancaster Colony missed Wall Street’s estimates and reported a rather uninspiring 2.9% year-on-year revenue decline, generating $457.8 million of revenue.

Looking ahead, sell-side analysts expect revenue to grow 4.7% over the next 12 months, similar to its three-year rate. This projection is underwhelming and suggests its newer products will not accelerate its top-line performance yet.

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.

Lancaster Colony’s average quarterly volume growth was a healthy 1.3% over the last two years. This is pleasing because it shows consumers are purchasing more of its products.

In Lancaster Colony’s Q1 2025, year on year sales volumes were flat. This result was a meaningful deceleration from its historical levels. We’ll be watching closely to see if Lancaster Colony can reaccelerate demand for its products.

At StockStory, we prefer high gross margin businesses because they indicate pricing power or differentiated products, giving the company a chance to generate higher operating profits.

Lancaster Colony has bad unit economics for a consumer staples company, giving it less room to reinvest and develop new products. As you can see below, it averaged a 23.3% gross margin over the last two years. Said differently, for every $100 in revenue, a chunky $76.66 went towards paying for raw materials, production of goods, transportation, and distribution.

Lancaster Colony’s gross profit margin came in at 23.1% this quarter, in line with the same quarter last year and analysts’ estimates. Zooming out, the company’s full-year margin has remained steady over the past 12 months, suggesting its input costs (such as raw materials and manufacturing expenses) have been stable and it isn’t under pressure to lower prices.

Lancaster Colony has done a decent job managing its cost base over the last two years. The company has produced an average operating margin of 10.4%, higher than the broader consumer staples sector.

Analyzing the trend in its profitability, Lancaster Colony’s operating margin rose by 2.8 percentage points over the last year, as its sales growth gave it operating leverage.

In Q1, Lancaster Colony generated an operating profit margin of 10.9%, up 3.4 percentage points year on year. The increase was encouraging, and because its operating margin rose more than its gross margin, we can infer it was more efficient with expenses such as marketing, and administrative overhead.

We track the change in earnings per share (EPS) for the same reason as long-term revenue growth. Compared to revenue, however, EPS highlights whether a company’s growth is profitable.

Lancaster Colony’s EPS grew at a remarkable 18.8% compounded annual growth rate over the last three years, higher than its 5.4% annualized revenue growth. This tells us the company became more profitable on a per-share basis as it expanded.

In Q1, Lancaster Colony reported EPS at $0.95, down from $1.03 in the same quarter last year. This print missed analysts’ estimates, but we care more about long-term EPS growth than short-term movements. Over the next 12 months, Wall Street expects Lancaster Colony’s full-year EPS of $5.62 to grow 25.9%.

If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.

Lancaster Colony has shown robust cash profitability, giving it an edge over its competitors and the ability to reinvest or return capital to investors. The company’s free cash flow margin averaged 9.5% over the last two years, quite impressive for a consumer staples business.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? Enter ROIC, a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).

Although Lancaster Colony hasn’t been the highest-quality company lately, it historically found a few growth initiatives that worked. Its five-year average ROIC was 17.6%, higher than most consumer staples businesses.

Businesses that maintain a cash surplus face reduced bankruptcy risk.

Lancaster Colony is a profitable, well-capitalized company with $124.6 million of cash and $41.82 million of debt on its balance sheet. This $82.74 million net cash position gives it the freedom to borrow money, return capital to shareholders, or invest in growth initiatives. Leverage is not an issue here.

We struggled to find many positives in these results. Its revenue missed significantly and its EPS fell short of Wall Street’s estimates. Overall, this was a weaker quarter. The stock traded down 5.3% to $182.72 immediately following the results.

Updated: May 22, 2025 at 10:45 PM EDT

The latest quarterly earnings matters, sure, but we actually think longer-term fundamentals and valuation matter more. Investors should consider all these pieces before deciding whether or not to invest in Lancaster Colony.

Lancaster Colony isn’t a terrible business, but it isn’t one of our picks. First off, its revenue growth was a little slower over the last three years, and analysts expect its demand to deteriorate over the next 12 months. And while its expanding operating margin shows the business has become more efficient, the downside is its brand caters to a niche market. On top of that, its gross margins make it more difficult to reach positive operating profits compared to other consumer staples businesses.

Lancaster Colony’s P/E ratio based on the next 12 months is 22.9x. At this valuation, there’s a lot of good news priced in - we think there are better investment opportunities out there.

Wall Street analysts have a consensus one-year price target of $194.90 on the company (compared to the current share price of $161).

Although the price target is bullish, readers should exercise caution because analysts tend to be overly optimistic. The firms they work for, often big banks, have relationships with companies that extend into fundraising, M&A advisory, and other rewarding business lines. As a result, they typically hesitate to say bad things for fear they will lose out. We at StockStory do not suffer from such conflicts of interest, so we’ll always tell it like it is.

Want to invest in a High Quality big tech company? We’d point you in the direction of Microsoft and Google, which have durable competitive moats and strong fundamentals, factors that are large determinants of long-term market outperformance.

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