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Smucker's (SJM) Pricing & Coffee Business Solid, Costs High

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·5 min read
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The J. M. Smucker Company SJM has been benefiting from the recovery in the Away from Home division and a focus on core strategies. The company’s coffee business has been impressive, in particular, due to increased at-home consumption. Also, robust pricing initiatives have been helping the company amid the rising cost inflation.

The company recently initiated a voluntary recall of certain Jif peanut butter products made at its Lexington, KY facility and sold mainly in the United States. The move was a result of potential salmonella contamination. The product recall impacted the company’s performance in the fourth quarter of fiscal 2022 and is likely to affect the fiscal 2023 top and bottom lines. That said, the abovementioned upsides are likely to continue working well for this Zacks Rank #3 (Hold) company.

What’s Working for The J.M. Smucker?

The J. M. Smucker is progressing well with core priorities, which include driving commercial excellence, reshaping the portfolio, streamlining the cost structure and unleashing its organization to win.  The company is benefiting from the revival of the Away from Home division. This was witnessed in the fourth quarter of fiscal 2022, with net sales advancing 12% to $271.2 million in the International and Away from Home segment. Excluding the impact of the natural beverage and grains businesses’ divestiture, as well as the negative impacts of currency movements, net sales escalated 13%. The continuation of these trends is likely to be an upside, especially with things getting back to normal.

The J. M. Smucker’s overall coffee portfolio looks encouraging as at-home coffee habits created during the pandemic and at-home consumption remain high. In the fourth quarter, net sales for Coffee grew 11%, backed by all brands in the company’s market-leading at-home coffee portfolio. Management stated that there is solid momentum in its Coffee business. At-home consumption now forms more than 70% of coffee-drinking occasions, per management’s fourth-quarter earnings call. In the quarter, SJM’s coffee brands were three of the top four fastest-growing at-home coffee brands. Moreover, the company outperformed the category in all areas, including one cup, mainstream, instant and premium.

Moving on, The J. M. Smucker benefited from the positive net price realization in the fourth quarter of fiscal 2022. During the quarter, net sales amounted to $2,033.8 million, which beat the consensus mark of $1,981 million. The top line advanced 6% year over year. Excluding non-comparable net sales related to divestitures and currency movements, net sales increased 9%. The uptick in comparable net sales can be attributed to the positive net price realization in each company segment. Solid results reflected the continued consumer demand for coffee and at-home food, together with strength in the company’s brands.

In fiscal 2023, management remains focused on sustaining its solid momentum by investing in growth areas like Uncrustables and teaming up with retailers to restock Jif products after the recent recall. For fiscal 2023, the company anticipates net sales to rise 3.5%-4.5% year over year. Excluding non-comparable sales related to the private label dry pet food and natural beverage and grains businesses’ divestitures, net sales are anticipated to improve nearly 6% at the midpoint of the net sales guidance. The view reflects the positive impacts of elevated net pricing to counter cost inflation in many categories.

Zacks Investment Research
Zacks Investment Research


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Key Headwinds

The J. M. Smucker is encountering cost inflation and supply-chain and transportation challenges along with isolated labor shortages. In the fourth quarter of fiscal 2022, the adjusted gross profit fell 10% to $655.2 million. The adjusted gross margin contracted from 37.9% to 32.2%, bearing some impacts of escalated costs, mainly stemming from higher commodity and ingredient, packaging and manufacturing costs.

In its fourth-quarter earnings release, management stated that pandemic-related impacts, together with cost inflation and a volatile supply chain, continue to affect the company’s results and cause risks for fiscal 2023. SJM expects cost inflation to have an impact of the mid-to-high teen percentage on the total cost of products sold in fiscal 2023. The adjusted gross margin is expected to be nearly 33-34% in fiscal 2023. Excluding the impact of the product recall in fiscal 2022 and 2023, the gross margin is likely to contract 30 basis points. Management’s earnings per share (EPS) guidance for fiscal 2023 includes the expected impact of inflated costs as well as elevated selling, distribution and administrative (SD&A) expenses. SD&A expenses are expected to rise about 9%, mainly due to higher compensations, elevated pre-production expenses and greater marketing expenditure.

Shares of the company have risen 1.6% in the past year compared to the industry’s decline of 3.1%.

3 Solid Staple Stocks

Some better-ranked stocks are Sysco Corporation SYY, Pilgrim’s Pride PPC and Campbell Soup CPB.

Sysco, which engages in marketing and distributing various food and related products, sports a Zacks Rank #1 (Strong Buy). Sysco has a trailing four-quarter earnings surprise of 9.1%, on average. You can see the complete list of today’s Zacks #1 Rank stocks here.

The Zacks Consensus Estimate for SYY’s current financial-year sales and EPS suggests growth of 32.6% and 124.3%, respectively, from the year-ago reported number.

Pilgrim’s Pride, which produces, processes, markets and distributes fresh, frozen and value-added chicken and pork products, carries a Zacks Rank #2 (Buy). Pilgrim’s Pride has a trailing four-quarter earnings surprise of 31.4%, on average.

The Zacks Consensus Estimate for PPC’s current financial-year EPS suggests growth of almost 43% from the year-ago reported number.

Campbell Soup, which manufactures and markets food and beverage products, currently carries a Zacks Rank #2. Campbell Soup has a trailing four-quarter earnings surprise of 10.8%, on average.

The Zacks Consensus Estimate for CPB’s current financial-year sales suggests growth of 0.5% from the year-ago reported figure.


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