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Smucker Misses on Earnings & Revs, Cuts View

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The J.M. Smucker Company (SJM), a leading manufacturer of food products, reported third-quarter fiscal 2014 adjusted earnings (excluding special project costs) of $1.66 per share. The results exceeded the prior-year adjusted earnings of $1.47 per share by 13% owing to lower share count. However, earnings lagged the Zacks Consensus Estimate by a penny due to lower-than-expected sales.

Revenue and Margin Details

Net sales in the quarter declined 6% year over year to $1.465 billion. The decline was due to a 6% decrease in net price realization, owing to price declines taken earlier in fiscal 2013, mainly on coffee and peanut butter.

In addition, volume gains realized in Crisco oils, Folgers coffee and the Robin Hood brand were offset by declines in Pillsbury baking mixes and flour and the negative impact of the previously announced exit of portions in International, Foodservice, and Natural Foods segments. Also, unfavorable mix and foreign exchange each reduced net sales by 1% in the quarter. The results also lagged the Zacks Consensus Estimate of $1.531 billion.

The acquisition of Enray Inc (Aug 2013) and the impact of the company's licensing and distribution agreement with Cumberland Packing Corp., which commenced on Jul 1, 2013 also added a combined $23.7 million to third quarter sales. However, these positives could not offset the price declines in coffee and peanut butter. Excluding acquisition and currency impact, sales declined 7% to $1.450 billion in the quarter.

Adjusted gross profit increased 2% to $548.1 million while adjusted gross margin improved 290 basis points (bps) to 37.4%, driven by lower input costs primarily that of green coffee. Adjusted operating profit increased 2.7% to $273.5 million whereas adjusted operating margin increased 160 bps to 18.7%, primarily due to decline in general, administrative and distribution expenses.

Segment Performance

U.S. Retail Coffee Market: The company's biggest segment, U.S. Retail Coffee Market, reported an 8% decline in sales to $578.9 million due to the impact of a 6% price decline from the past year, unfavorable mix and increased promotional spending during the holiday season, which more than offset the impact of lower commodity costs. Net sales of K-cups declined 3%, while volumes improving 2% driven by the Folgers brand and Dunkin' Donuts (DNKN) packaged coffee.

The segment's operating margin expanded 360 bps to 31.5% in the quarter owing to improved volumes, lower green coffee costs, which more than offset the negative impact of lower price realization, decreased marketing expenses and lower manufacturing overheads.

U.S. Retail Consumer Foods: U.S. Retail Consumer Foods segment sales declined 4% to $557.8 million due to the impact of a 7% price decline from the past year. Segment volumes were also flat. Segment profit margin expanded 60 bps to 18.9% in the quarter, primarily due to lower commodity costs, primarily for peanuts, oils, and flour.

The company expects peanut costs and manufacturing costs to decline in the second half of fiscal 2014, thus resulting in segment profit growth.

International, Foodservice and Natural Foods:Net sales in the International, Foodservice and Natural Foods segment declined 6% from the previous-year quarter to $328.8 million due to lower volume. Excluding the impact of the acquired Enray business, the Cumberland distribution agreement and foreign exchange, segment net sales decreased 11% from the prior-year period.

The sales decline was due to the impact of the exit of the company's hot beverage and Smucker's Uncrustables frozen sandwich businesses and an unfavorable mix. Segment volume declined 2%, excluding the acquisition impact, as increases in the Robin Hood and Five Roses brands in Canada were more than offset by the impact of the exited foodservice businesses.

The segment's profit margin contracted 60 bps to 13.6% in the reported quarter due to the impact of the foodservice businesses exit, increase in marketing expenses and currency headwinds, despite lower commodity costs.

Lowered Guidance

Following lower-than-expected results, the company lowered its sales and earnings guidance for fiscal 2014. In addition, the company anticipates lower volumes in the fourth quarter, a difficult pricing environment in key categories and currency headwinds to persist in fiscal 2014.

Management now expects its earnings in the range of $5.55 to $5.60 (excluding the special project costs of 20 cents per share), lower than the prior expectation of $5.72 to $5.82 per share. The company has also lowered its sales guidance and now expects fiscal 2014 net sales to go down 5% on a year-over-year basis compared to its previous expectation of a decline of 2%. The company lowered its sales guidance in the last quarter too. Smucker holds a Zacks Rank #4 (Sell).

Other better ranked food companies include Post Holdings Inc (POST), Kraft Foods Group Inc (KRFT) and Hain Celestial Group Inc (HAIN). All of them carry a Zacks Rank #2 (Buy).

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