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The J.M. Smucker (SJM) Hurt by High Costs, Supply-Chain Woes

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The J.M. Smucker Company (SJM - Free Report) appears to be in troubled waters. The company is encountering cost inflation of key commodities along with supply-chain volatility surrounding the availability of labor and transportation. These factors affected first-quarter fiscal 2022 results, which were also hurt by Crisco and Natural Balance business divestitures. Management curtailed its fiscal 2022 earnings view. Further, the sales guidance suggests a decline from the year-ago period.

The Zacks Consensus Estimate for fiscal 2022 bottom line has declined from $8.91 to $8.46 per share over the past 30 days. Shares of the Zacks Rank #4 (Sell) company have declined 11.2% in the past three months compared with the industry’s 8.4% fall.

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

Soft FYQ1 & 2022 View

The J. M. Smucker saw year-over-year declines in the top and bottom lines when it posted first-quarter fiscal 2022 results. The results were hurt by impacts of the Crisco and Natural Balance business divestitures as well as cost inflation. Adjusted earnings of $1.90 per share fell 20% year over year due to cost inflation and unfavorable timing of pricing actions (which came into effect toward the quarter-end).

Net sales amounted to $1,858 million, which declined 6% year over year. Excluding non-comparable sales related to divestitures (of Crisco and Natural Balance businesses) as well as currency movements, net sales inched up 1% from a year ago. Lower volume/mix in the International operating unit and U.S. Retail Coffee segments were downsides. Volume/mix in the U.S. Retail Coffee segment was affected by tough comparisons with the year-ago period’s retailer inventory restocking.

The company remains troubled by the pandemic-related disruptions, cost inflation and supply-chain volatility. These factors also cause uncertainty for management’s fiscal 2022 guidance, which may be affected by any manufacturing or supply-chain headwind; volatile consumer mobility and buying behavior; retailer inventory levels as well as macroeconomic factors. Management lowered its earnings per share guidance. While it increased its sales guidance, the projected figure still suggests a decline from the year-ago period.

For fiscal 2022, The J. M. Smucker now anticipates net sales to decline 1.5-2.5% year over year compared with 2-3% decrease expected before. The net sales guidance includes an impact of $355.6 million associated with the Crisco and Natural Balance divestitures. That said, adjusted earnings per share for fiscal 2022 are now envisioned in the range of $8.25-$8.65, down from $8.70-$9.10 expected before. Adjusted earnings per share came in at $9.12 for fiscal 2021. The bottom-line view indicates lower net sales, adjusted gross margin of roughly 36%, and nearly 6% fall in SD&A costs. Owing to cost inflation and the timing of pricing actions, management expects earnings per share to decline in the second and third quarters of fiscal 2022.

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Key Headwinds

The J. M. Smucker is encountering cost inflation of key commodities along with supply-chain volatility surrounding the availability of labor and transportation. Adjusted gross profit tumbled 15% year over year to $646.2 million for the first quarter of fiscal 2022. Adjusted gross profit margin declined to 34.8% from 38.5% reported in the year-ago quarter. This was accountable to elevated commodity and transportation costs, mainly in the Pet Foods segment. Also, adverse volume/mix and the impact of divestitures hurt the gross margin. Consequently, adjusted operating income declined 20% year over year to $323.4 million. Adjusted operating margin came in at 17.4%, down from 20.5% reported in the year-ago quarter.

On first-quarter earnings call, The J.M. Smucker stated that it expects to encounter escalated raw material and logistic costs. Management expects supply-chain disruptions and cost inflation to persist throughout the rest of fiscal 2022. For fiscal 2022, management now expects gross profit margin to be 36%, down from 37-37.5% expected before. This can be accountable to escalated cost of commodities, ingredients, transportation and packaging. Cost inflation is now expected to have a high-single digit impact on the cost of goods sold.

Wrapping Up

The J.M. Smucker is benefiting from the revival of the Away from Home division. Additionally, management is focused on pricing and saving initiatives to minimize the effects of the abovementioned cost headwinds. That said, the timing of these pricing actions is unlikely to completely offset cost inflation in fiscal 2022.

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