Smucker (SJM) Down 2.4% Since Last Earnings Report: Can It Rebound?

A month has gone by since the last earnings report for Smucker (SJM). Shares have lost about 2.4% 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 the most recent earnings report in order to get a better handle on the important catalysts.

Smucker Q2 Earnings & Sales Top Estimates, View Raised

Smucker posted second-quarter fiscal 2021 results. Adjusted earnings of $2.39 per share rose 6% year over year and beat the Zacks Consensus Estimate of $2.24. The year-over-year increase can be attributed to higher sales in the quarter.

Net sales amounted to $2,034 million, which beat the consensus mark of $2,013 million. Moreover, the top line increased 4% year over year on the back of improved volume/mix in the U.S. Retail Coffee and U.S. Retail Consumer Foods units, courtesy of higher at-home consumption amid the pandemic. This was partly countered by lower volume/mix for the Away From Home segment.

Adjusted gross profit increased about 4% year over year to $786.7 million and adjusted gross margin expanded 20 basis points (bps) to 38.7%. Adjusted operating income grew roughly 5% to $408.8 million and adjusted operating margin expanded 10 bps to 20.1%.

Segment Performance

U.S. Retail Pet Foods: Segment sales came in at $708.7 million, including a 1 percentage point favorable impact from volume/mix, countered by a 1 percentage point adverse impact from pricing. Volume/mix was backed by growth in cat food and dog snacks, which was somewhat offset by declines in dog food. Segment profit fell 9% due to lower pricing and elevated marketing costs.

U.S. Retail Coffee Market: Net sales rose 9% to $594.7 million. Volume/mix improved 10 percentage points, driven by higher at-home coffee consumption. However, unfavorable net pricing resulted in a 1 percentage point headwind on sales. Segment profit was up 11%, thanks to improved volume/mix and reduced SD&A expenses – partly offset by the effect of net pricing and costs.

U.S. Retail Consumer Foods: Sales in the segment increased 12% from the prior-year quarter’s figure to $479.1 million. The figure was driven by an improved volume/mix of 7%, which in turn was driven by higher at-home consumption. Moreover, net pricing had a positive impact of 5 percentage points. Segment profit surged 48% on the back of improved volume/mix, a favorable effect from net pricing and costs as well as a decline in SD&A expenses.

International and Away From Home: Net sales decreased 10% to $251.5 million, mainly due to a 24% decline in the company’s Away From Home division. This was partly made up by a 7% sales growth in the International division. Volume/mix for the overall International and Away From Home segment lowered sales by 11 percentage points, while net pricing had a 1 percentage point positive impact. Foreign currency movements were neutral. Segment profit fell 22% due to adverse volume/mix, and unfavorable effect from higher net pricing and costs, partly countered by reduced SD&A expenses.

Financials

Smucker exited the quarter with cash and cash equivalents of $405.6 million, long-term debt (less current portion) of $3,914.5 million and total shareholders’ equity of $8,515 million. Cash flow from operations amounted to $378.7 million in the quarter and free cash flow nearly doubled year over year to $326.3 million.

Fiscal 2021 Guidance

Smucker now expects net sales growth of 1-2%, compared with the previous range of flat to 1% growth. The top-line view reflects escalated at-home consumption, aiding the U.S. Retail Coffee and U.S. Retail Consumer Foods segments. However, the view includes coronavirus-induced declines in the Away From Home segment as well as the lapping of $185 million worth of pandemic-related additional sales recorded in the fourth quarter of fiscal 2020.

Adjusted earnings per share for fiscal 2021 are now anticipated in the range of $8.55-$8.85. Prior to this, management expected adjusted earnings per share in a band of $8.20-$8.60. Gross margin is anticipated in the range of 37.5-38%. SD&A costs are projected to increase 1-2% year over year. Free cash flow is now expected in the range of $975-$1,025 million. Earlier, the company envisioned the metric in a band of $925-$975 million. Further, management expects capital expenditures of $305 million.

Markedly, the guidance doesn’t include any impact of the pending divestiture of the company’s Crisco oils and shortening business to B&G Foods (BGS). The deal is expected to conclude in Smucker’s third-quarter fiscal 2021 and affect net sales and adjusted earnings per share by nearly $100 million and 20 cents, respectively, in fiscal 2021 (excluding any possible gain related to sale proceeds).

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in estimates review.

VGM Scores

At this time, Smucker has an average Growth Score of C, though it is lagging a lot on the Momentum Score front with an F. 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 upward for the stock, and the magnitude of these revisions looks promising. Notably, 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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