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Smucker (SJM) Down More Than 15% in 6 Months on Soft Sales

Zacks Equity Research

The J. M. Smucker Company SJM has been losing investors’ confidence due to drab sales trend, stemming from lower net price realization and adverse impact of the U.S. baking unit divestiture. Moreover, adverse currency movements have been a persistent headwind. The company witnessed these trends in its second-quarter fiscal 2020 results, wherein management slashed guidance for fiscal 2020.

Smucker now expects net sales for fiscal 2020 to be down 3% compared with the previous guidance of flat to 1% growth. On a comparable basis, sales are now projected to decline 2% compared with flat to up 1% expected earlier. Additionally, adjusted earnings per share are now anticipated in the range of $8.10-$8.30, down from $8.35-$8.55 projected earlier. 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.

Clearly, the dismal performance and outlook has dented analysts’ optimism regarding the stock’s performance. This is evident from a 2.5% decline in the Zacks Consensus Estimate for fiscal 2020 earnings, which has moved to $8.15 in the past 30 days. In fact, persistent lackluster performance has been weighing on investors’ sentiments for long. Consequently, this Zacks Rank #4 (Sell) stock has declined 15.4% in the past six months against the industry’s growth of 5.9%.

Let’s take a closer look at the factors that are hurdles in Smucker’s path.

What’s Hurting Smucker's Performance?

The company has been witnessing weakness in its top line for a long time. In second-quarter fiscal 2020, net sales amounted to $1,957.8 million that missed the consensus mark for the third consecutive time. Further, Smucker’s top line fell 3.2% year over year during fiscal second quarter, following a decline of 6% in fiscal first quarter.
During fiscal second quarter, the top line dropped mainly due to the divestiture of the U.S. baking business. Also, the same had a negative impact on the performance of International, Away from Home and U.S. Retail Consumer Foods performance. Moreover, unfavorable comparisons, stemming from the U.S. baking business divestiture, are expected to continue to put pressure on the company’s performance in fiscal 2020. This is evident from management’s drab sales outlook, which includes a loss of $105.9 million due to the divestiture of the U.S. baking business and non-comparable sales associated with Ainsworth.

Also, Smucker’s top line has been hurt by lower net price realization for the past few quarters. During the second quarter, the company’s sales (excluding items that impact comparability) were affected by 1 percentage point thanks to lower net price realization. Lower net price realization was a drag on the company’s U.S. Retail Coffee and U.S. Retail Consumer Foods segments. Persistence of such headwinds is a concern.

This apart, the company witnessed adverse currency impact of roughly $1.8 million in the International Away From Home segment during fiscal second quarter. Unfavorable currency fluctuations lower revenue growth prospects and are a considerable risk for Smucker.

Any Scope for Revival?

Smucker actively pursues acquisitions in the United States as well as overseas. We note that the buyout of Ainsworth has been bolstering performance of the U.S. Retail Pet Foods category. Other noteworthy acquisitions include Big Heart Pet Brand, Sahale Snacks, Enray Inc as well as coffee brands and business operations of Rowland Coffee. These acquisitions added iconic brands to Smucker’s portfolio and improved revenue prospects.

Additionally, Smucker looks to cut costs for driving investments and enhancing operating performance. In fiscal 2019, the company generated savings of nearly $30 million through the right-spend program.

While management is undertaking several initiatives, we are yet to see if these can completely offset the aforementioned hurdles and bring a turnaround for the stock. Until then, investors can count on promising picks.

Top picks

e.l.f. Beauty, Inc ELF, with a Zacks Rank #2 (Buy), has a long-term earnings per share (EPS) growth rate of 3.8%. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The Procter & Gamble Company PG, with a Zacks Rank #2, has a long-term EPS growth rate of 7.5%.

Landec Corporation LNDC, with a Zacks Rank #2, has a long-term EPS growth rate of 10%.

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