A month has gone by since the last earnings report for Smucker (SJM). Shares have lost about 8.8% in that time frame, outperforming 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 drivers.
Smucker Misses on Q2 Earnings, Cuts Fiscal '19 View
Smucker reported second-quarter fiscal 2019 results, with the top and the bottom line missing the Zacks Consensus Estimate. Further, the company lowered fiscal 2019 outlook, which reflects impacts of the U.S. baking business divestiture. This seems to have marred investors’ optimism in the stock, which lost almost 5% during the pre-market trading session on Nov 28.
However, earnings and sales improved year on year in the reported quarter. Sales in the quarter were mainly driven by the Ainsworth acquisition. Additionally, some of the company’s key brands continued to perform well.
Quarter in Detail
Adjusted earnings of $2.17 per share rose almost 7% year over year, but missed the Zacks Consensus Estimate of $2.33.
Net sales of the company came in at $2,021.5 million, which missed the consensus mark of $2,049 million. However, the top line increased 5% year over year, mainly driven by the Ainsworth buyout and gains from the company’s growth brands. Notably, the Ainsworth acquisition contributed $184.2 million during the quarter. These upsides were partially offset by impacts from non-comparable net sales in the year-ago quarter, stemming from the divestiture of the U.S. baking business.
Excluding items that impact comparability, the top line declined 1% due to lower net price realization across peanut butter, coffee and pet food categories. Nevertheless, favorable volume/mix aided net sales by almost 1 percentage point.
Adjusted gross profit climbed approximately 3% to $771.4 million. However, adjusted gross margin contracted 60 basis points (bps) to 38.2%. Adjusted operating income increased roughly 8% to $415.7 million, while adjusted operating margin expanded 60 bps to 20.6%.
U.S. Retail Coffee Market: The company's U.S. Retail Coffee Market segment sales came in at $544.9 million, which inched down 1% from the prior-year quarter’s tally. This was caused by reduced net price realization. This was partially compensated by favorable volume/mix, stemming from brands such as 1850, Dunkin' Donuts and Cafe Bustelo. These were countered by declines in the Folgers brand and ground coffee.
Profit in the segment jumped 15% to $174.3 million owing to lower input costs, somewhat negated by escalated marketing costs.
U.S. Retail Consumer Foods: Sales in the segment dipped 12% to $461.9 million. Excluding the baking business, net sales rose 1% year over year, as gains stemming from volume/mix for Uncrustables, Smucker’s brands, Crisco and Jif were partially countered by lower net price realization for oils and peanut butter.
Profit in the segment increased 3% to $134.3 million, owing to gains from the divestiture of the baking business.
U.S. Retail Pet Foods: Net sales increased 32% to $728.1 million owing to contributions from the Ainsworth buyout. Excluding the impacts from this buyout, sales in the segment fell 1% due to discontinuation of Gravy Train products.
Segment profit inched up 1% to $123.9 million, supported by gains from Ainsworth. Excluding this buyout, profit in the segment declined due to increased raw material and freight costs.
International and Away from Home: Net sales dipped 2% from the prior-year quarter’s tally to $286.6 million, owing to lower net price realization, unfavorable currency rates and noncomparable net sales in the year-ago quarter, stemming from the divestiture of the U.S. baking business. The downsides were partially compensated by favorable volume/mix. Segment profit rose 2% to $56.7 million, owing to reduced marketing expenses as well as benefits from reduced pricing and costs.
Smucker exited the quarter with cash and cash equivalents of $171.2 million, long-term debt (less current portion) of $5,885.1 million and total shareholders’ equity of $8,030 million. Cash flow from operations amounted to $202.9 million in the quarter and free cash flow totaled $125.1 million.
Fiscal 2019 Outlook
The company is encouraged by the performance of its pet foods business in the second quarter that gained from the Ainsworth acquisition, which drove overall performance. Moreover, this Zacks Rank #3 (Hold) company’s growth brands continued to perform well, backed by effective strategies.
Further, the company lowered fiscal 2019 view to reflect the negative impacts stemming from the U.S. Baking business divestiture, lower pricing and competitive activity in certain categories. Accordingly, the company expects net sales for fiscal 2019 at $7.9 billion, down from the prior forecast of $8 billion.
Further, the company envisions fiscal 2019 adjusted earnings per share (EPS) in the range of $8.00-$8.20, down from the prior view of $8.40-$8.65.
Additionally, free cash flow is projected in the range of $700-$750 million compared with the previous view of $770-$820 million. Capital expenditures are continued to be projected in the range of $350-$370 million in fiscal 2019.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed a downward trend in fresh estimates. The consensus estimate has shifted -10.75% due to these changes.
Currently, Smucker has a subpar Growth Score of D, though it is lagging a bit 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 C. If you aren't focused on one strategy, this score is the one you should be interested in.
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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