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J.M. Smucker (SJM) Beats on Q2 Earnings, Reiterates View

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The J.M. Smucker Company (SJM - Free Report) , a leading manufacturer of food products, posted mixed second-quarter fiscal 2017 results. While the bottom line surpassed estimates for the sixth straight quarter, sales marked its second consecutive miss. Nonetheless, management reaffirmed its guidance for fiscal 2017, underscoring confidence in its growth prospects.

Adjusted earnings for the second quarter came in at $2.05 per share, which exceeded the Zacks Consensus Estimate of $1.94 and jumped about 7% year over year. The year-over-year improvement was driven by additional synergy realization, reduced tax rate and lower share count.

SMUCKER JM Price, Consensus and EPS Surprise
 

SMUCKER JM Price, Consensus and EPS Surprise | SMUCKER JM Quote

Additional synergy realization for the second quarter was $28.5 million, whereas the same came in at $60.5 million for the first half of the fiscal year. Further, the company remains on track to achieve $100 million of incremental synergies in fiscal 2017.

Revenue and Margin Details

Net sales in the quarter declined 8% year over year to $1,913.9 million due to the divested U.S. canned milk business. Excluding the divested business and currency headwinds, net sales dropped 5%. This fall was attributable to lower net price realization resulting from lower net pricing on coffee. Unfavorable volume/mix, owing to the U.S. Retail Pet Foods segment and the Folgers and Jif brands, also contributed to lower net sales. Moreover, net sales lagged the Zacks Consensus Estimate of $2,001 million.

Adjusted gross profit dropped 3% due to lower net pricing, which was somewhat offset by a reduction in commodity and manufacturing overhead expenses, coupled with additional synergies.

Adjusted operating profit, however, inched up 0.5% to $396.2 million owing to lower selling, distribution and administrative expenses.

Segment Performance

U.S. Retail Coffee Market: The company's biggest segment, U.S. Retail Coffee Market, reported a 6% slump in sales to $551.8 million. This was attributable to lower net price realization, which in turn mainly stemmed from lower list price of coffee. Further, sales were hampered by unfavorable volume/mix, attributable to soft Folgers volumes, partly compensated by Dunkin' Donuts and Café Bustelo volume gains.

Segment profit advanced 3% to $186.5 million, reflecting the net benefit of lower commodity and manufacturing expenses, partially negated by reduced net pricing, unfavorable volume/mix and higher marketing costs.

U.S. Retail Consumer Foods: This segment’s sales plunged 13% to $557.3 million due to the U.S. canned milk divestiture. Excluding the impact of the divestiture, net sales decreased 4%. The decline reflected lower net price realization and unfavorable volume/mix that in turn was primarily attributable to weakness witnessed across Pillsbury and Jif brands, partly compensated by benefits from Smucker's Uncrustables frozen sandwiches.

Segment profit fell 7% to $118.9 million, primarily due to the loss of U.S. canned milk profits.

U.S. Retail Pet Foods: Segment net sales were $531 million in the quarter, which represented a 6% year-over-year decline, due to unfavorable volume/mix stemming from softness in Kibbles 'n Bits and Meow Mix brands. A slight decline in net price realization also contributed to the decrease in net sales.

Segment profit slipped 0.5% to $114.5 million as benefits from synergy realization, lower manufacturing and marketing expense were countered by the impact of unfavorable volume/mix.

International and Foodservice: Net sales in the International and Foodservice segment decreased 3% from the prior-year quarter to $273.8 million, due to lower net price realization and the divested U.S. canned milk business. This was somewhat offset by favorable volume/mix.

Segment profit fell 7% to $51.7 million, bearing the brunt of the divested business and unfavorable pricing and costs. However, this too was partly compensated by favorable volume/mix.

Financials

J.M. Smucker ended the quarter with cash and cash equivalents of $121.8 million, long-term debt of $4,945.4 million and total shareholders’ equity of $7,180.1 million.

In the first half of fiscal 2017, the company generated nearly $375.3 million as cash from operating activities. Further, in the second quarter, it had free cash flow of $102.6 million, whereas the same amounted to $291.3 million for the first half of the fiscal year.

Fiscal 2017 Outlook

Management remains impressed with its quarterly performance and retains its focus on achieving long-term targets like attaining sustainable cost reductions. The company intends to leverage the cost cuts to boost the bottom line and support the growth of its brands, to augment shareholder value.

That said, the company reiterated its outlook. J.M. Smucker continues to envision fiscal 2017 earnings in the range of $7.60−$7.75 per share. Further, management expects net sales to decrease 2%−3% from fiscal 2016, reflecting the U.S. canned milk divestiture. Excluding the impact of the divestiture, net sales are still expected to range from flat to down 1%.

Also, management expects to incur about $240 million as capital expenditures during the fiscal, wherein it anticipates generating free cash flow of roughly $1 billion.

Zacks Rank

J.M. Smucker currently carries a Zacks Rank #4 (Sell). Better-ranked stocks in the diversified food space include Sysco Corporation (SYY - Free Report) , Ingredion Incorporated (INGR - Free Report) and Lancaster Colony Corporation (LANC - Free Report) , each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Sysco Corporation’s earnings have outperformed the Zacks Consensus Estimate by an average of 11.7% in the trailing four quarters. Moreover, its long-term EPS growth rate of 8.8% and positive estimate revisions over the past 30 days bode well.

Ingredion Incorporated, with a long-term EPS growth rate of 11%, has seen positive estimate revisions for 2016, over the past 30 days. The company also flaunts a solid earnings surprise history.

Lancaster Colony has posted positive earnings surprises consistently for three quarters now. Also, the company has seen its estimates move north in the past 7 days.

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