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Smucker Gains on Yielding Buyouts, Cost Saving on Track

Zacks Equity Research
The divestment move is in sync with Kroger's (KR) plan to shrink its non-grocery footprint and make investments in strengthening the grocery offerings and e-commerce base.

High operational expenses are weighing on the performance of many food companies, including The J. M. Smucker Company SJM. Nevertheless, the company is managing to beat the odds on the back of efficient strategies such as buyouts, cost reduction and e-commerce expansion. Let’s take a look.

Portfolio Boosting Efforts   

Smucker pursues acquisitions in the United States as well as overseas. We note that the buyout of Ainsworth is bolstering performance of the U.S. Retail Pet Foods category and driving the top line. In fact, during the third quarter of fiscal 2019, net sales increased 6% year over year, mainly driven by the Ainsworth buyout and gains from the company’s growth brands. Other noteworthy acquisitions of the company include — Big Heart Pet Brand (pet food maker), Sahale Snacks (branded nut and fruit snacks maker), Enray Inc. (manufacturer of organic, gluten-free ancient grain products) and coffee brands as well as business operations of Rowland Coffee.

These acquisitions have added iconic brands to the company’s portfolio and strengthened its presence in the United States. Apart from Smucker, other food companies such as United Natural Foods UNFI are also focusing on expanding its portfolio through prudent buyouts. Coming back to Smucker, it has formed key partnerships with a few coffee companies. Smucker’s agreement with Keurig Green Mountain and Dunkin’ Brands Group, Inc to manufacture and sell the K-Cup category of products is yielding results.

Additionally, the company is on track with product launches under some of its popular banners such as 1850 coffee, Folgers, Milk-Bone and Nutrish. The company is also accelerating marketing support for its growth brands.

E-commerce Expansion & Cost Savings

Growing trend of online customers has propelled Smucker to focus on e-commerce channel to boost sales. In fact, e-commerce is a fast-growing retail channel of the company. In the digital realm, the coffee and pet food categories are steadily expanding. Management expects to continue gaining from increasing online sales in the forthcoming periods. Moreover, the company is utilizing the digital platform to enhance consumer engagement.

Additionally, the company resorts to cost savings to fuel investments and enhance operating performance. Earlier in fiscal 2018, the company generated synergies of nearly $200 million from its pet food synergy program. Going ahead, management is focused on cost reduction and optimization efforts to ensure greater profitability. Further, it is on track to generate cost savings and synergies from the Ainsworth buyout.

Wrapping Up

Smucker’s selling, distribution and administrative (SD&A) expenses have been rising for a while. We note that during the third, the second and the first quarter of fiscal 2019, SD&A expenses rose 13%, 6% and 10%, respectively, primarily due to the buyout of Ainsworth. Also, interest costs related to the acquisition are a drag. Other food companies such as Sysco Corporation SYY and TreeHouse Foods, Inc THS are also grappling with rising expenses.

Nonetheless, we expect that Smucker’s robust cost-saving efforts and well-chalked moves to strengthen business will cushion the aforementioned hurdles. That said, we expect the company to maintain its position as a prominent player in the food space.

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