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Smucker (SJM) Gains on Pandemic-Led Demand, Cost Concerns Stay

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The J. M. Smucker Company (SJM - Free Report) is one of the food stocks, which has been benefiting from rising demand stemming from the pandemic-led elevated at-home consumption. Such trends have been driving its retail business, while the company’s Away-From-Home business has been troubled. Also, escalated costs have been a concern for the company.

Nonetheless, Smucker is poised to benefit from its growth endeavors. To this end, the company’s recently unveiled strategic priorities bode well. Let’s delve deeper.

Factors Aiding Smucker’s Growth

The company has been benefiting from increased at-home consumption amid the pandemic, which has been fueling its retail business. This was evident when Smucker posted robust second-quarter fiscal 2021 results, wherein both top and bottom lines cruised past the Zacks Consensus Estimate and increased year over year. Results were backed by strength in the company’s U.S. Retail Coffee and U.S. Retail Consumer Foods segments, owing to increased at-home consumption amid the pandemic. Sales in the company’s coffee, consumer and international retail businesses together advanced 10% on higher at-home consumption.

Additionally, Smucker is benefiting from consumers’ increased inclination toward shopping online, especially amid the pandemic. Incidentally, e-commerce is a fast-growing retail channel of the company. During second-quarter fiscal 2020, overall e-commerce sales surged 45% and formed 11% of the company’s total U.S. retail sales. Management expects to witness continued strength in the e-commerce channel in the forthcoming periods. Moreover, the company is utilizing the digital platform to enhance consumer engagement.

Apart from this, Smucker recently outlined its strategic priorities, which include redesigning the portfolio, upgrading the commercial model and streamlining the organization. In this regard, management laid down four pillars of operational priorities for the next 12-18 months. As part of operational priorities, Smucker expects to drive commercial excellence by transforming the marketing and sales model. Through this growth pillar, it also plans to create a dedicated pet food sales organization.

Further, the company expects to streamline the cost infrastructure by staying committed to enhancing productivity, while focusing on lowering costs. Management notified that this will help it generate $50 million of annual cost savings in each of the next three fiscal years. Also, management expects to delayer and streamline the organization, with an aim of enhancing decision making and attaining agility through its “Unleashing the organization to win” strategic pillar. In addition, Smucker is on track to reshape its portfolio. This involves making investments in areas of maximum growth potential and exiting brands and businesses that are not in sync with the long-term goals. To this end, the company recently signed a deal to offload its Natural Balance premium pet food business to Nexus Capital Management LP. Also, Smucker sold its Crisco oils and shortening business to B&G Foods (BGS - Free Report) on Dec 2. 

Will Hurdles be Offset?

While coronavirus-led increased stay-at-home trends have been boosting Smucker’s retail business, the same has been hurting its Away From Home business. During the second quarter of fiscal 2021, net sales in the International and Away From Home segment decreased 10% to $251.5 million, mainly due to a 24% decline in the Away From Home division. Smucker’s sales guidance for fiscal 2021 includes coronavirus-induced declines in the Away From Home segment as well as the lapping of $185 million worth of pandemic-related additional sales recorded in the fourth quarter of fiscal 2020.

Moreover, the company has been seeing high costs. Management, on its last earnings call, notified that it expects a 1-2% rise in SD&A expenses in fiscal 2021 mainly due to elevated marketing expenditure and incentive compensation. The company stated that it intends to increase its marketing investments in the second half of fiscal 2021, including mass media, digital engagement, e-commerce, and click and collect programs.

Nevertheless, robust demand amid the pandemic and focus on strategic pillars are likely to help Smucker fight the abovementioned headwinds and keep it well placed. We note that the Zacks Rank #3 (Hold) stock has rallied 10.7% in a year compared with the industry’s growth of 2.4%.

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Medifast (MED - Free Report) , which currently carries a Zacks Rank #2 (Buy), has a trailing four-quarter earnings surprise of 20.2%, on average. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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