Smucker's 2Q In Line, Updates View

The J.M. Smucker Company ( SJM - Analyst Report ) reported second quarter fiscal 2013 adjusted earnings (excluding special project costs of 9 cents) of $1.45 per share, which was in line with the Zacks Consensus Estimate. Reported earnings surpassed the prior-year quarter adjusted earnings of $1.29 per share by 12%. Robust sales growth and lower outstanding shares due to share buyback boosted earnings.

Revenue Details

Net sales in the quarter increased 8% year over year to $1.63 billion compared with $1.51 billion a year ago, owing to acquisition impact and favorable sales mix. The acquisitions contributed $90.7 million to net sales growth.

The year-over-year improvement was driven by volume gains in the higher priced K-Cups coffee brand. The results were in line with the Zacks Consensus Estimate. Organic net sales grew 2% to $1.54 billion in the quarter.

The company completed its acquisition of the North American foodservice coffee and hot beverage business on January 3, 2012 from Sara Lee Corporation, which has completed its spin-off of D.E MASTER BLENDERS 1753 and renamed the North American business as Hillshire Brands Company ( HSH - Snapshot Report ) .

Volumes excluding the impact of the acquisition declined 2% in the reported quarter. Price realization was slightly lower as price declines in coffee offset pricing gains in peanut butter over the past year.

Margin Details

Excluding special project costs, gross profit increased 6.4% to $544.4 million compared with $511.4 million in the year-ago period, driven by the acquired Sara Lee foodservice business and strong coffee growth. Gross margin, however, contracted 40 basis points (bps) to 33.4% in the second quarter of fiscal 2013 due to higher costs of sales. Operating profits, excluding the impact of project costs, increased 8.2% to $261.5 million in the reported quarter. Operating margin expanded 10 bps to 16.1%.

Segment Performance

U.S. Retail Coffee Market: The company’s biggest segment, U.S. Retail Coffee Market, reported a 1% increase in sales to $622.5 million, aided by increased volume and sales mix of K-Cups, offset by the impact of price declines since the last year quarter. The segment’s operating margin expanded 270 bps to 25.4% in the quarter, as favorable mix and volume growth more than offset the significant increase in marketing expenses.

U.S. Retail Consumer Foods:U.S. Retail Consumer Foods segment sales rose 1% to $619.3 million, driven by higher price realization offset by decline in volume and sales mix. Volume went down 6% during the quarter. The segment’s profit margin contracted 90 bps to 17.9% in the quarter, primarily due to increase in costs for peanut butter. These were partially offset by higher price realization and a decrease in marketing and other expenses.

International, Foodservice and Natural Foods: Net sales in the International, Foodservice and Natural Foods segment increased 38% from the previous-year quarter to $387.0 million, driven by acquisitions. Volume increased 4% in the quarter on the back of Robin Hood brand and Five Roses Canadian flour brands as well as non-branded beverages. The segment’s profit margin also inflated 110 bps to 15.0% in the second quarter of fiscal 2013.

Financial Updates

During the second quarter of fiscal 2013, the company repurchased 2.0 million shares for approximately $170.9 million. As of October 31, 2012, the company has approximately 1.9 million common shares remaining for repurchase under the authorization.

Fiscal 2013 Guidance

The company has maintained its sales guidance for fiscal 2013. Management expects its net sales to increase 7% over the prior-year period. The sales guidance reflects the expected net sales contribution from the Sara Lee food service business.

The company raised its fiscal 2013 adjusted earnings guidance, excluding special project costs of 40 cents per share, to the range of $5.12 to $5.22 per share compared with $5.00 to $5.10 per share forecasted previously.

Currently, we hold a Zacks #3 Rank (short-term Hold rating) on Smucker, which competes with Green Mountain Coffee Roasters Inc. ( GMCR - Analyst Report ) . Over the long term, we have a Neutral recommendation on the stock.