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The J.M. Smucker Company (SJM - Analyst Report),a leading manufacturer of food products,reported better-than-expected third quarter fiscal 2013 adjusted earnings (excluding special project costs) of $1.47 per share. The results exceeded both the Zacks Consensus Estimate of $1.37 by 7.3% and the prior-year adjusted earnings of $1.22 per share by 20% on the back of robust sales growth and lower share count due to share buybacks.

Revenue and Margin Details

Net sales in the quarter increased 6% year over year to $1.560 billion compared with $1.468 billion a year ago, driven by benefits of acquisition and favorable sales mix. The acquisition of Sara Lee business contributed $59.7 million to net sales growth.

The year-over-year improvement was also driven by volume gains in the higher priced K-Cups coffee brand and peanut butter business. The results were slightly above the Zacks Consensus Estimate of $1.557 billion. Organic net sales grew 2% to $1.50 billion in the quarter.

The company acquired Sara Lee Corporation’s North American foodservice coffee and hot beverage business in January last year. Later in June, Sara Lee had become two independent companies after the spin-off in May, with D.E MASTER BLENDERS 1753 focusing on the international Coffee & Tea business, and Sara Lee’s North American business was named as Hillshire Brands Company , focusing on meat-centric food products and foodservice operations.

Adjusted gross margin expanded 190 basis points to 34.5%, driven by the acquired Sara Lee foodservice business, favorable mix and lower green coffee costs which offset the impact from higher peanut costs. Despite higher operating expenses, adjusted operating margins increased 120 basis points to 17.1%, reflecting strong sales.

Segment Performance

U.S. Retail Coffee Market: The company’s biggest segment, U.S. Retail Coffee Market, reported a 2% decline in sales to $627.7 million due to the impact of price declines taken from the past year. The segment’s operating margin expanded 520 bps to 27.9% 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 4% to $581.3 million, driven by higher price realization and favorable sales mix, which offset a 1% decline in volume. The segment’s profit margin contracted 90 bps to 18.3% in the quarter, primarily due to increase in costs of peanut butter. These were partially offset by higher price realization, sales mix and a decrease in marketing and selling expenses.

International, Foodservice and Natural Foods: Net sales in the International, Foodservice and Natural Foods segment increased 28% from the previous-year quarter to $350.6 million, driven by acquisitions, favorable sales mix and higher price realization. The segment’s profit margin contracted 10 basis points to 14.2% in the third quarter of fiscal 2013 due to higher raw material costs and higher distribution expenses.

Fiscal 2013 Guidance

Management raised its lower end of its earnings guidance, excluding special project costs of 40 cents per share, to the range of $5.17 to $5.22 per share compared with $5.12 to $5.22 per share announced previously.

The company expects its fiscal 2013 net sales to increase 6% over the prior-year period, reflecting the expected net sales contribution from the Sara Lee food service business. The company earlier expected growth of 7% over the fiscal 2012 period.

Our Take

We are encouraged with 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.

Other stocks worth a look in the food products industry are Flower Foods Inc (FLO - Snapshot Report) and J&J Snack Foods Corp (JJSF - Snapshot Report), both of them carrying a Zacks Rank #1 (Strong Buy).

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