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The J.M. Smucker (SJM) Looks Troubled: Input Costs a Challenge

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The J. M. Smucker Company (SJM - Free Report) appears to be in a difficult shape, with its shares down 6.6% in the past six months compared with the industry’s decline of 4.7%. The company has been battling cost inflation, which is expected to prevail through the rest of fiscal 2022. Apart from this, many other food companies like Kellogg (K - Free Report) , TreeHouse Foods (THS - Free Report) and Campbell Soup (CPB - Free Report) , among others, are battling cost inflation.

Coming back to The J. M. Smucker, cost inflation affected management’s earnings guidance for the fiscal year. Apart from this, management’s sales guidance suggests a decline from the year-ago period. Let’s take a closer look.

Cost Inflation & Other Concerns

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

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Talking of the fiscal first quarter, both earnings and sales fell year over year. Results were hurt by impacts of the Crisco and Natural Balance business divestitures as well as cost inflation. The adjusted earnings of $1.90 per share fell 20% year over year due to cost inflation and the 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 the prior year. Lower volume/mix in the International operating unit and the 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 J.M. Smucker, on its first-quarter earnings call, stated that it expects to encounter elevated raw material and logistic costs. Management predicts supply-chain disruptions and cost inflation to prevail throughout the rest of fiscal 2022. For fiscal 2022, management now expects the gross profit margin to be 36%, down from the 37-37.5% expected before. This can be attributable to the high 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. Nonetheless, management is focused on pricing and saving initiatives to minimize the impact of these headwinds.

Fiscal 2022 View

The J. M. Smucker 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 the 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 be down 1.5-2.5% year over year compared with the 2-3% decrease expected before. The net sales guidance includes an impact of $355.6 million associated with the Crisco and Natural Balance divestiture. That said, the adjusted earnings per share for fiscal 2022 are now envisioned in the range of $8.25-$8.65, down from the $8.70-$9.10 estimated before. The adjusted earnings per share came in at $9.12 per share in fiscal 2021. The bottom-line view indicates lower net sales, adjusted gross margin of roughly 36% and a nearly 6% fall in SD&A costs. Due to cost inflation and the timing of pricing actions, the Zacks Rank #4 (Sell) company expects earnings per share to decline in the second and third quarters of fiscal 2022.

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