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Smucker's Q2 Earnings & Revs Lag Estimates

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The J.M. Smucker Company (SJM), a leading manufacturer of food products, reported second-quarter fiscal 2014 adjusted earnings (excluding special project costs) of $1.52 per share. The results exceeded the prior-year adjusted earnings of $1.45 per share by 5% owing to lower share count and lower interest expenses.

However, earnings lagged the Zacks Consensus Estimate of $1.59 by 4.4% due to lower-than-expected sales.

Revenue and Margin Details

Net sales in the quarter declined 4% year over year to $1.559 million. The decline was due to a 4% decrease in net price realization, reflecting price declines taken earlier in fiscal 2013, mainly on coffee and peanut butter. Volume declines in private label foodservice roast, ground coffee and cappuccino led to the decline in the quarter.

In addition, volumes of Smucker's Uncrustables frozen sandwiches declined due to the impact of the previously announced exit of portions of the business in International, Foodservice, and Natural Foods segments. The results also lagged the Zacks Consensus Estimate of $1.609 million.

Volume gains were realized in Crisco oils, Folgers coffee, Jif peanut butter, and Smucker's fruit spreads. The acquisition of Enray Inc (Aug 2013) and the impact of the company's licensing and distribution agreement with Cumberland Packing Corp., which commenced on Jul 1, 2013 also added a combined $21.5 million to second quarter sales. However, these positives could not offset the price declines in coffee and peanut butter.

Adjusted gross profit increased 2% to $554.9 million while gross margin improved 220 basis points (bps) to 35.6%, driven by lower input costs primarily that of green coffee. Adjusted operating profit also declined 1% to $260.0 million, primarily due to an increase in selling, distribution, and administrative expenses, the impact of the previously announced foodservice business exit, and a decrease in U.S. Retail Consumer Foods segment profit, which offset an increase in U.S. Retail Coffee segment profit. Operating margin however increased 60 bps to 16.7%.

Segment Performance

U.S. Retail Coffee Market: The company's biggest segment, U.S. Retail Coffee Market, reported a 4.4% decline in sales to $594.9 million due to the impact of a 6% price decline from the past year, which more than offset the impact of lower commodity costs. Net sales of K-cups were also flat. However, volumes improved 2% driven by Folgers brand and Dunkin' Donuts packaged coffee.

The segment's operating margin expanded 390 bps to 30.3% in the quarter owing to lower green coffee costs, which more than offset the negative impact of lower price realization.

U.S. Retail Consumer Foods: U.S. Retail Consumer Foods segment sales declined 1.1% to $612.6 million, as lower price realization offset the favorable sales mix. Segment volumes were also flat. Segment profit margin contracted 170 bps to 16.2% in the quarter, primarily due to significantly lower price realization of peanut butter and fruit spreads. Lower price realization offset the benefit from lower commodity costs.

The company expects peanut costs and manufacturing costs to decline in the second half of fiscal 2014, thus resulting in segment profit growth.

International, Foodservice and Natural Foods: Net sales in the International, Foodservice and Natural Foods segment declined 8.9% from the previous-year quarter to $352.4 million due to lower volume. Excluding the impact of the acquired Enray business, the Cumberland distribution agreement and foreign exchange, segment net sales decreased 13% over the prior-year period.

Segment volume declined 10% as the company exited portions of the company's hot beverage and Smucker's Uncrustables frozen sandwich businesses, with foodservice customer and planned declines in Santa Cruz Organic lemonades. Excluding these items, segment volume declined 4%. Lower net price realization due to price declines on coffee also led to segment sales decline in the reported quarter.

The segment's profit margin contracted 150 bps to 13.5% in the reported quarter due to the impact of the foodservice businesses exit. Despite lower commodity costs were lower and the addition of the Cumberland and Enray businesses which contributed to segment profit, the positives were more than offset by lower net price realization. Foreign exchange rates also unfavorably impacted profits in the second quarter of fiscal 2014.


For fiscal 2014, management reiterated its earnings guidance in the range of $5.72 to $5.82 per share (excluding the special project costs of 20 cents per share). The company however expects fiscal 2014 net sales to go down 2% on a year-over-year basis compared to its previous expectation of a decline of 1% due to difficult retail conditions.

Overall, we are encouraged by the company's continued focus on its brands through innovations and promotional offerings, strategic acquisitions, improving volumes and effective utilization of cash through buybacks. The company is well positioned to drive profits in the coming quarters. Smucker holds a Zacks Rank #2 (Buy).

Other food companies that are worth considering include Omega Protein Corp (OME), Pinnacle Foods Inc (PF) and Hain Celestial Group Inc (HAIN). While Omega holds a Zacks Rank #1 (Strong Buy), Pinnacle Foods and Hain Celestial carry a Zacks Rank #2 (Buy).

Read the Full Research Report on SJM
Read the Full Research Report on PF
Read the Full Research Report on HAIN
Read the Full Research Report on OME

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