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The J.M. Smucker (SJM) Gains on Demand Amid Cost Hurdles

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The J. M. Smucker Company (SJM - Free Report) has been benefiting from its focus on core priorities, revival in the away from home division, and prudent buyouts and alliances. These upsides are likely to work well for the company amid the rising cost challenges and supply-chain bottlenecks. Let’s delve deeper.

Things Working Well for The J. M. Smucker

The J. M. Smucker is progressing well with core priorities, which include driving commercial excellence, reshaping the portfolio, streamlining the cost structure and unleashing its organization to win. The strength of such strategies is helping SJM navigate complex supply-chain challenges. Also, this is helping the company improve in-store fundamentals and the stock performance of the brands. The company is implementing inflation-justified pricing actions across all businesses with lesser-than-anticipated elasticity impacts.

On its last earnings call, management highlighted that it raised or maintained the market share for 68% of its U.S. Retail revenues in the third quarter of fiscal 2022. The company is committed to increasing its focus and resources to reshape the portfolio to achieve sustainable growth across the pet food and pet snacks, coffee and snacking categories. Further, to streamline costs, management has been optimizing its supply chain, lowering discretionary costs and expanding network production efficiencies. Management expects SD&A expenses to decline by 10% in fiscal 2022, reflecting gains from cost management and organizational restructuring programs, reduced marketing expenses, lower incentive compensation and declines in discretionary expenses.

For reshaping the portfolio, The J. M. Smucker concluded the divestiture of the Private Label Dry Pet Food business and the Natural Beverage and Grains business in the third quarter of fiscal 2022. Before this, management divested the Natural Balance premium pet food business in February 2021. Also, the company sold its Crisco oils and shortening business to B&G Foods (BGS - Free Report) in December 2020. Earlier, The J. M. Smucker divested its U.S. canned milk and U.S. baking businesses. Such moves will help the company focus on its resources and the portfolio of the pet food, snacking and coffee categories. Additionally, SJM formed key partnerships with quite a few coffee companies. In this regard, the company's alliance with JDE Peet’s is noteworthy. Further, the company’s agreement with Keurig Green Mountain (KGM) and Dunkin’ Brands Group, Inc, to manufacture and sell the K-Cup category of products has been yielding positive results since fiscal 2016.

The J. M. Smucker Company is benefiting from the revival of the away from home division. This was witnessed in the third quarter of fiscal 2022, with net sales advancing 13% to $265.6 million in the International and away from home segment.  Management stated that the company’s away from home business sales returned to about 95% of pre-pandemic levels, with liquid coffee and portion control spreads being major contributors to the revival.

The J. M. Smucker expects to see continued strength in demand for its products. Management remains encouraged about its overall coffee portfolio as at-home coffee habits created during the pandemic are likely to stay. On a comparable basis, net sales for fiscal 2022 are anticipated to improve by nearly 4.5% at the midpoint of the adjusted earnings per share (EPS) guidance range. This is likely to be backed by a rebound in away from home channels, increased net pricing across several categories, an improved volume/mix for core brands in each U.S. Retail unit and continued double-digit net sales growth for SJM’s Uncrustables brand. These are likely to be partly negated by a deceleration in at-home consumption and supply-chain headwinds (which are likely to impact the company’s pet food business).

Key Headwinds

The J. M. Smucker is encountering cost inflation and supply-chain and transportation challenges along with isolated labor shortages. In the third quarter of fiscal 2022, the adjusted gross profit fell 8% to $712.3 million. The adjusted gross profit margin declined to 34.6% from 37.3% reported in the year-ago quarter. This was a result of the elevated cost of commodities and ingredients, manufacturing, packaging and transportation together with a lower volume/mix. Apart from this, the comparison with profits related to divestitures also impacted gross margin growth. These were somewhat compensated by pricing actions. The adjusted operating income dropped by 6% to $377.9 million. The adjusted operating margin came in at 18.4%, down from 19.4% reported in the year-ago quarter due to a lower gross margin.

The adjusted gross margin is expected to be nearly 35% in fiscal 2022, with cost inflation expected to have a low double-digit impact on the total cost of products sold. In the fourth quarter, management expects a gross margin decline of roughly 350 basis points (bps), mainly due to inflated green coffee costs.

Other Companies Battling Cost Woes

Several other food companies are battling cost-related challenges. Conagra Brands (CAG - Free Report) is encountering cost of goods sold inflation for a while now. Despite raising its fiscal 2022 organic net sales guidance, Conagra lowered its adjusted operating margin and EPS view due to increased cost of goods sold inflation and the timing lag related to extra pricing activities. Though CAG is taking necessary pricing and saving actions, these are not likely to fully offset input cost inflation in fiscal 2022 due to a timing lag between announcing and implementing these actions.

B&G Foods has also been battling cost inflation. In the fourth quarter of fiscal 2021, BGS’ gross margin of 19.7% contracted by 160 bps. The fourth-quarter 2021 gross margin was hurt by the greater-than-anticipated input cost inflation. B&G Foods expects the input cost inflation to have a considerably industry-wide effect in fiscal 2022.

Kellogg’s (K - Free Report) fourth-quarter 2021 gross margin was hurt by accelerated market-driven cost inflation, supply-chain disruptions and costs related to the strike in the U.S. cereal business. Kellogg expects cost inflation to reach a double-digit rate, with the first-half inflation higher than the second-half inflation in 2022. K anticipates witnessing persistent supply-chain bottlenecks and shortages at least through the first half of 2022.

Coming back to The J.M. Smucker, the abovementioned upsides are likely to help the company stay firm amid cost headwinds.


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