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Smucker (SJM) Looks Unappetizing: Stock Plunges 23% in a Year

Zacks Equity Research

Things have been quite sour for The J. M. Smucker Company SJM, which has lost close to 23% this year compared with the industry’s decline of 20.1%. The company has been battling escalated costs and lower net price realization. These factors, which also compelled management to curtail its outlook for fiscal 2019 in the last reported results, have been weighing on investors’ confidence.

Let’s delve deeper.

All That’s Ailing Smucker

Smucker continues to bear the brunt of higher freight expenses. In fact, high freight costs marred profitability in the U.S. Retail Pet Foods category in the second quarter of fiscal 2019. Moreover, management expects increased freight costs to be a drag on earnings in fiscal 2019. Well, many food companies like Campbell Soup CPB, General Mills GIS and Conagra Brands CAG, among others, are also struggling with cost-related hurdles.

Coming back to Smucker, the company’s SG&A expenses witnessed 6% year-over-year growth during the second quarter, primarily due to the addition of Ainsworth. Prior to this, SG&A expenses rose 10% in the first quarter. Also, interest expenses rose 28.8% due to costs related to the Ainsworth acquisition. We note that interest expenses went up 27.6% in the first quarter, preceded by 17.6% and 6.9% in the fourth and third quarters of fiscal 2018, respectively. Persistence of these trends is a concern for the company’s bottom line.

Smucker is also reeling under lower net price realization. Evidently, the company’s top line declined 1% during the second quarter (excluding items that impact comparability), due to lower net price realization. Further, such a headwind dragged gross margin in the said period. In fact, lower net price realization has been weighing on the performance of the company’s U.S. Retail Coffee, the International and Away from Home categories for a while.

Owing to the aforementioned hurdles, Smucker’s top and bottom lines missed the Zacks Consensus Estimate during the second quarter of fiscal 2019. In fact, this marks the company’s third consecutive quarter of earnings and sales miss. Performance in the quarter was also marred by the divestiture of the U.S. baking business.

To top it, management lowered fiscal 2019 view to reflect the negative impacts stemming from the divestiture as well as increased freight expenses and timing shifts in acquisition synergies. Accordingly, the company expects net sales for fiscal 2019 to be $7.9 billion, down from the prior forecast of $8 billion. Further, the company envisions fiscal 2019 adjusted earnings per share of $8.00-$8.20, down from the prior view of $8.40-$8.65. Additionally, the company projects earnings to decline almost 20% year over year in the third quarter.

Although Smucker is making quite strong efforts to enhance its performance, these obstacles keep us somewhat apprehensive about this Zacks Rank #4 (Sell) stock for the time being. Moreover, the Zacks Consensus Estimate for the third quarter and fiscal 2019 have gone down from $2.26 to $2.03 and $8.40 to $8.03, respectively, over the past 60 days.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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