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The J.M. Smucker (SJM) Raises View on Q3 Earnings & Sales Beat

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The J. M. Smucker Company (SJM - Free Report) posted solid results for third-quarter fiscal 2021, as both top and bottom lines grew year over year and surpassed the respective Zacks Consensus Estimate. Results were backed by strength in the company’s U.S. as well as International retail businesses, thanks to the pandemic-led increased at-home consumption and gains from its ongoing consumer-centric strategy. This was somewhat countered by declines in the Away From Home business.

The company remains focused on its strategic priorities, as part of which it concluded two divestitures in the quarter under review. This will help the company focus its resources and portfolio on pet food, snacking and coffee categories. A robust third-quarter show and solid momentum in leading brands encouraged management to raise its guidance for fiscal 2021. Meanwhile, The J. M. Smucker remains focused on making brand investments to aid growth.

Quarter in Detail

Adjusted earnings of $2.45 per share rose 4% year over year and beat the Zacks Consensus Estimate of $2.22. The year-over-year increase can be attributed to higher sales.

The J. M. Smucker Company Price, Consensus and EPS Surprise

The J. M. Smucker Company Price, Consensus and EPS Surprise

The J. M. Smucker Company price-consensus-eps-surprise-chart | The J. M. Smucker Company Quote

Net sales amounted to $2,076.7 million, which beat the consensus mark of $2,018 million. Moreover, the top line increased 5% year over year. Excluding non-comparable sales of the divested Crisco and Natural Balance businesses alongside removing the impact of favorable currency movements, net sales advanced 7%. This was backed by improved volume/mix in all U.S. Retail segments, partly countered by lower volume/mix for the Away From Home segment. Net price realization was neutral in the quarter under review.

Adjusted gross profit increased nearly 3% year over year to $775.6 million, while the adjusted gross margin contracted 80 basis points (bps) to 37.3%. Adjusted operating income grew roughly 2% to $403.9 million, though the adjusted operating margin fell 70 bps to 19.4%. Notably, selling, distribution and administrative expenses grew 4% to $371.7 million.

 

Segment Performance

U.S. Retail Pet Foods: Segment sales grew 6% to $768.7 million owing to improved volume/mix, somewhat countered by reduced net price realization as well as the absence of sales from the divested Natural Balance business. Volume/mix was backed by growth in cat food and dog snacks, while dog food remained neutral. Segment profit fell 7% due to lower pricing and elevated costs.

U.S. Retail Coffee Market: Net sales rose 12% to $625.9 million. Volume/mix improved on Dunkin', Folgers and Cafe Bustelo brands, which were backed by higher at-home coffee consumption. This was partly offset by unfavorable net price realization. Segment profit was up 11%, thanks to improved volume/mix, partly offset by reduced net pricing and elevated marketing costs.

U.S. Retail Consumer Foods: Sales in the segment increased 6% from the prior-year quarter’s $447.6 million. Excluding the impact of the divested Crisco business, net sales advanced 16%, driven by an improved volume/mix. Volume/mix was fueled by higher at-home consumption of Smucker's Uncrustables frozen sandwiches, Jif peanut butter and Smucker's fruit spreads. Moreover, elevated net pricing had a positive impact on net sales. Segment profit surged 32% on the back of improved volume/mix and higher pricing, partially negated by increased input costs, escalated marketing expenses and the absence of profit from the divested Crisco business.

International and Away From Home: Net sales decreased 13% to $234.6 million. Excluding the impact of the Crisco divestment, net sales decreased 11% mainly due to a 27% decline in the company’s Away From Home division. This was partly made up by 9% sales growth in the International division. Volume/mix for the overall International and Away From Home segments lowered sales by 11 percentage points and net price realization had a 1 percentage point adverse impact. Foreign currency movements were favorable. Segment profit fell 50% due to adverse volume/mix, reduced pricing and escalated costs.

Financials

The J. M. Smucker exited the quarter with cash and cash equivalents of $501.5 million, long-term debt (less current portion) of $3,915.3 million and total shareholders’ equity of $8,211.6 million. Cash flow from operating activities amounted to $486.3 million in the quarter and free cash flow was nearly $416.6 million. Free cash flow is now expected to be $1.1 billion in fiscal 2021. Earlier, the company envisioned the metric in a band of $975-$1,025 million. Further, management expects capital expenditures of $300 million.

The company’s net debt repayments amounted to $314.1 million in the third quarter. Apart from this, The J. M. Smucker repurchased 4.5 million shares worth $521.9 million in the same time period.

Fiscal 2021 Guidance

The J. M. Smucker now expects net sales growth of 2% compared with the previous range of flat to 1% growth. The top-line view reflects escalated at-home consumption, aiding the U.S. Retail Coffee and U.S. Retail Consumer Foods segments. However, the view includes coronavirus-induced declines in the Away From Home segment; the lapping of $185 million worth of pandemic-related additional sales recorded in the fourth quarter of fiscal 2020 and non-comparable sales worth $166 million in the year-ago period of the divested businesses.

Adjusted earnings per share for fiscal 2021 are now anticipated in the range of $8.70-$8.90. Prior to this, management expected adjusted earnings per share in a band of $8.35-$8.65. Gross margin is anticipated to be nearly 38%, while SD&A costs are projected to increase 3-4%.

Management expects the pandemic to continue impacting its results in fiscal 2021. Apart from this, volatile consumer behavior, retailer inventory levels, any manufacturing or supply-chain hurdles, and macroeconomic factors can affect The J. M. Smucker’s performance this year.

Shares of this Zacks Rank #3 (Hold) company have gained 3.7% in the past year compared with the industry’s growth of 11.8%.

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