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Will Escalated Costs Show on Smucker's (SJM) Q3 Earnings?

Zacks Equity Research

The J. M. Smucker Company SJM is slated to release third-quarter fiscal 2019 results on Feb 26. The company has underperformed the Zacks Consensus Estimate by average of 1.1% over the trailing four quarters, with a negative earnings surprise in each of the last three quarters. Let’s see how this provider of pet food and pet snacks, among other products, is positioned ahead of the upcoming quarterly results.

The J. M. Smucker Company Price and EPS Surprise

The J. M. Smucker Company Price and EPS Surprise | The J. M. Smucker Company Quote

What to Expect?

The Zacks Consensus Estimate has remained stable in the past 30 days at $2.03, which reflects a decline of 18.8% from the year-ago quarter’s figure. Nevertheless, the consensus mark for revenues is $1,984 million, depicting rise of 4.3% from the year-ago quarter’s figure.

Factors Posing Threats

Smucker has been incurring high freight expenses for a while now, which marred profitability in the U.S. Retail Pet Foods category in the second quarter. Moreover, management expects increased freight costs to be a drag on earnings in fiscal 2019, which also raises concerns for the quarter to be reported. Escalated costs have been denting the performance of many food companies like Campbell Soup CPB, TreeHouse Foods THS and General Mills GIS, among others.

Coming back to Smucker, the company’s SG&A expenses witnessed 6% year-over-year growth during the second quarter, primarily due to the addition of Ainsworth. Also, interest expenses rose 28.8% due to costs related to the Ainsworth acquisition. We note that interest expenses went up 27.6% in the first quarter, preceded by 17.6% and 6.9% in the fourth and third quarters of fiscal 2018, respectively. Persistence of these trends is a concern for the company’s bottom line this time as well.

Also, Smucker’s lower net price realization is a concern.  Excluding items that impact comparability, the company’s top line declined 1% during the second quarter, owing to lower net price realization. Further, such a headwind dragged gross margin in the said period. In fact, lower net price realization has been weighing on performance of the company’s U.S. Retail Coffee, the International and Away from Home categories for a while.

Can Buyouts & Innovation be Saviors?

Smucker should get some relief from its buyout gains and focus on innovations, which are likely to drive the top line. The company recently acquired Ainsworth, which has been bolstering the performance of the U.S. Retail Pet Foods category. In fact, during the second quarter of fiscal 2019, net sales were largely driven by the Ainsworth buyout and gains from the company’s growth brands. Other noteworthy acquisitions of the company include Big Heart Pet Brand, Sahale Snacks, Enray Inc., and coffee brands and business operations of Rowland Coffee, among others. These acquisitions are set to aid Smucker’s top line in the quarter under review.

Additionally, Smucker has formed key partnerships with quite a few coffee companies. Smucker’s agreements with Keurig Green Mountain and Dunkin’ Brands Group, Inc to manufacture and sell the K-Cup category of products have been yielding positive results since fiscal 2016, and also bode well for the impending quarter. Additionally, the company should continue benefitting from its endeavors to keep enriching its portfolio with popular brands. Smucker's Uncrustable brand has been particularly doing well, with net sales increasing 15% in fiscal 2018. Smucker also is focused on brand building through product innovations. Its recent launches include 1850 premium coffee and Jif PowerUps snacks. Further, the company is on track with developing products in the pet foods category.

While these factors should act as top-line drivers in the third quarter, they may not be able to fully offset the aforementioned hurdles.

What the Zacks Model Unveils

Our proven model doesn’t show a beat for Smuckerthis earnings season. For this to happen, a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold). You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter. You can see the complete list of today’s Zacks #1 Rank stocks here.

Smucker, which has an Earnings ESP of 0.00%, carries a Zacks Rank #4 (Sell). Well, we caution against sell-rated stocks going into earnings announcement.

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