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The J. M. Smucker Co. SJM recently lowered packaged coffee prices of the majority of its products sold in the U.S., primarily consisting of items under the Folgers and Dunkin' Donutsbrands. Smucker licenses Dunkin’ Donuts from Dunkin’ Brands Group, Inc. DNKN.

All Folgers fans will benefit from the lower pricing on an everyday basis. Ohio-based Smucker has slashed prices by an average 6% on all products under the Folgers and Dunkin' Donuts brands, in response to the continuous decline in green coffee futures market. However, the price decrease does not affect K-cup pods.

We note that this is the second time within a year that the biggest U.S. coffee roaster has lowered its coffee prices. In Jul 2015, Smucker had lowered its packaged coffee prices of the majority of its products sold in the U.S. by 6%. That means there has been a sustained decline in green coffee costs since July.

Per Reuters, the arabica and robusta prices were almost the same as in July, which signals that the move to cut packaged coffee prices was more than a response to declining raw material costs.

Of late, the company is struggling to compete with lower-priced private label brands like Safeway Select, The Kroger Co.'s  KR Kroger and Costco Wholesale Corporation’s COST Kirkland Signature, which have grabbed higher market share in recent years. In such a competitive environment, Smucker’s move to slash coffee prices will help it to win more customers and boost sales.

Smucker’s profitability largely depends on the price of green coffee. Coffee prices are highly volatile and are affected by weather and pest infestation. Also political decisions in coffee-producing countries, worldwide supply and demand, the relative strength of the dollar, and speculative trading also influence coffee prices.

Since Jan 2014, Smucker has been witnessing a rise in green coffee costs, largely due to increasing prices of Arabica coffee due to a drought in Brazil. As a result, in Jun 2014, Smucker increased packaged coffee prices of Folgers and Dunkin' Donuts branded coffee products by an average 9%. In Dec 2014, Smucker raised the price of K-Cups in the U.S. by an average 8%.

A hike in coffee prices led Smucker to raise the pricing of its branded roast and ground coffee offerings, which eroded its sales volume. Higher pricing of Smucker products also resulted in customers switching to cheaper brands and delaying purchases. This significantly hurt the company’s coffee segment.

Nevertheless, this Zacks Rank #2 (Buy) company experienced favorable volumes in the third quarter of fiscal 2016, driven by the cut in coffee prices in July. The recent cut in coffee prices will further boost volumes in the coming quarters.

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