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Smucker (SJM) Down 0.4% Since Last Earnings Report: Can It Rebound?

Zacks Equity Research

It has been about a month since the last earnings report for Smucker (SJM). Shares have lost about 0.4% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Smucker due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.

Smucker Q2 Earnings Beat Estimates, Revenues Miss

The J. M. Smucker Company posted second-quarter fiscal 2020 results, wherein the bottom line grew year over year and beat the Zacks Consensus Estimate but sales were soft. Results were hurt by persistent softness in premium dog food offerings and the divestiture of the U.S. baking business, among other factors. To top it, management slashed sales and earnings guidance for fiscal 2020.

Quarter in Detail

Adjusted earnings of $2.26 per share rose 4% year over year and comfortably beat the Zacks Consensus Estimate of $2.13. The year-over-year increase can be attributable to lower interest expenses and a reduced tax rate.

Net sales of the company amounted to $1,957.8 million, which missed the consensus mark of $1,987 million. Moreover, the top line dropped 3.2% year over year, mainly due to the divestiture of the U.S. baking business and currency headwinds. Excluding these factors, the top line declined 1% due to lower net price realization. Volume/mix was flat year over year.

Although Smucker’s sales were affected by persistent softness in premium dog food offerings, management is pleased with the performance of the rest of the portfolio. Notably, Smucker maintained solid momentum at its cat food and pet snacks businesses and the Uncrustables brand. Also, the company saw improved market share for its high-growth coffee brands.

Adjusted gross profit fell 2.4% to $753.1 million, while the adjusted gross margin expanded 30 basis points to 38.5%. Adjusted operating income decreased 5.9% to $391 million and the adjusted operating margin contracted 60 basis points to 20%.

Segment Performance

U.S. Retail Pet Foods: Segment sales came in at $709.9 million, which dropped 2% from the prior-year quarter’s figure owing to lower private-label sales and reduced volume/mix. Private label sales were hurt by planned exits as well as weakness at various retailers. However, improved net price realization offered some respite.

U.S. Retail Consumer Foods: Net sales declined 8% to $426.1 million, due to the divestiture of the baking business. Excluding the non-comparable results, sales in the segment fell 1% on reduced net pricing, somewhat compensated by improved volume/mix.

U.S. Retail Coffee Market: Sales in the segment were flat at $543.4 million, as lower net price realization was offset by favorable volume/mix.

International and Away From Home: Net sales decreased 3% from the prior-year quarter to $278.4 million, thanks to adverse volume/mix, impacts from the divestiture of the U.S. baking business and currency headwinds. Net price realization was neutral in the quarter.

Financials

Smucker exited the quarter with cash and cash equivalents of $48.8 million, long-term debt (less current portion) of $4,584.5 million and total shareholders’ equity of $8,095.3 million. Cash flow from operations amounted to $224 million in the second quarter and free cash flow totaled $160.6 million.

Fiscal 2020 Outlook

Smucker lowered its sales guidance for fiscal 2020, expecting soft second-quarter sales and weak sales in the second half of the fiscal, mainly due to various brands in the U.S. Retail Pet Foods segment. This also led to a lowered earnings view.

Smucker now expects net sales to be down 3% compared with the previous guidance of flat to 1% growth. The revised top-line view includes a loss of $105.9 million stemming from the divestiture of the U.S. baking business and $25.4 million from non-comparable sales associated with Ainsworth. On a comparable basis, sales are now projected to decline 2% compared with flat to up 1% expected earlier.

Adjusted earnings per share are now anticipated to be $8.10-$8.30, down from $8.35-$8.55 projected earlier. Smucker’s adjusted earnings came in at $8.29 per share in fiscal 2019. The bottom line is likely to be affected by reduced contributions from sales, while a 2% anticipated decline in SD&A costs is likely to offer some cushion. Gross margin is anticipated to be roughly 38.5% in fiscal 2020.

Free cash flow is now projected to be roughly $850 million, down from the prior guidance of $875-$925 million.


 

How Have Estimates Been Moving Since Then?

It turns out, fresh estimates have trended downward during the past month. The consensus estimate has shifted -7.83% due to these changes.

VGM Scores

Currently, Smucker has an average Growth Score of C, though it is lagging a bit on the Momentum Score front with a D. However, the stock was allocated a grade of B on the value side, putting it in the top 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. It's no surprise Smucker has a Zacks Rank #4 (Sell). We expect a below average return from the stock in the next few months.



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