The J. M. Smucker Company SJM is well positioned for growth, courtesy of its buyouts, alliances and cost-saving efforts. These upsides have been helping the company stay afloat amid hurdles like lower net price realization and impacts of the U.S. baking business divestiture. Let’s delve deeper.
Hurdles in Smucker’s Way
The divestiture of the U.S. baking business has been leading to a year-over-year decline in Smucker’s top line for quite some time now. We note that during the first quarter of fiscal 2020, the top line dropped roughly 6% year over year, mainly due to the divestiture of the U.S. baking business. Unfavorable comparisons stemming from this divestiture are expected to affect the company’s performance in fiscal 2020.
This is evident from management’s drab sales outlook, which includes a loss of $105.9 million, stemming from the aforementioned divestiture and non-comparable sales associated with Ainsworth. Apart from these, planned exits of certain pet food products have been a drag and are expected to adversely impact sales in the second quarter.
This apart, Smucker’s top line has been hurt by lower net price realization for the last few quarters. During the first quarter of fiscal 2020, the company’s top line (excluding items that impact comparability) was affected by nearly 1 percentage point, stemming from reduced net price realization.
The same also weighed on its U.S. Retail Coffee, U.S. Retail Consumer Foods, International and Away from Home categories. Persistence of such headwinds is concerning.
Strategies Likely to Act as Saviors
Smucker’s constant focus on buyouts is expected to continue driving growth. To this end, the Ainsworth acquisition has been bolstering the U.S. Retail Pet Foods category as well as the company’s top line. Evidently, during the first quarter of fiscal 2020, net sales benefited from this buyout and gains from the company’s growth brands. Notably, the Ainsworth acquisition contributed an additional $25 million during the quarter. It also made positive contributions to the company’s adjusted gross profit.
Other noteworthy acquisitions include Big Heart Pet Brand, Sahale Snacks, Enray Inc, and coffee brands and business operations of Rowland Coffee, among others. These acquisitions have added iconic brands to the company’s portfolio and strengthened its presence in the United States. Additionally, Smucker’s agreement to manufacture and sell the K-Cup category of products has been yielding positive results since fiscal 2016. The company has been consistently extending partnership with KGM to augment K-Cup business opportunities.
Additionally, Smucker looks to cut costs for driving investments and enhancing operating performance. In fiscal 2019, the company reported savings of nearly $30 million through the right-spend program. Going ahead, management focuses on cost reduction and optimization efforts to ensure greater profitability. In fact, SD&A costs are expected to slightly decline in fiscal 2020.
Such strong efforts along with Smucker’s focus on boosting the online business are likely to help it counter headwinds and drive the stock further. Markedly, this Zacks Rank #3 (Hold) stock has rallied almost 16% year to date compared with the industry’s growth of 18.1%.
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MEDIFAST MED, also with a Zacks Rank #2, has delivered positive earnings surprise in the trailing three quarters.
J&J Snack Foods JJSF, with a Zacks Rank #2, has an impressive earnings surprise record.
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