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Smucker (SJM) Q3 Earnings Match Estimates, Shares Decline

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The J.M. Smucker Company (SJM - Free Report) , a leading manufacturer of food products, posted mixed third-quarter fiscal 2017 results. The bottom line meets estimates, after posting positive surprises in the past six straight quarters. However, sales marked its third consecutive miss. Further, shares declined 2.79% in the pre-market trading session, as the company announced weak view for fiscal 2017.

Adjusted earnings for the third quarter came in at $2.00 per share, which was in-line with the Zacks Consensus Estimate. Earnings declined 2.4% year over year. Excluding the gain on the divestiture in the prior year, adjusted earnings per share increased 5%. The year-over-year improvement was driven by additional synergy realization, reduced tax rate and lower share count.

Additional synergy realization for the third quarter was $26.3 million, whereas the same came in at $60.5 million for the first half of the fiscal year. The company now expects $120 million of incremental synergies in fiscal 2017, an increase from $100 million expected previously.

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

 

J.M. Smucker Company (The) Price, Consensus and EPS Surprise | J.M. Smucker Company (The) Quote

Revenue and Margin Details

Net sales in the quarter declined 5% year over year to $1.88 billion. Excluding the milk business divestiture on Dec 31, 2015 (which impacted last year’s quarter) and currency headwinds (which impacted this quarter), net sales dropped 3%. The fall was due to lower net price realization mostly in the U.S. Retail Pet Foods segment and unfavorable volume/mix in the U.S. Retail Coffee segment. Net sales also lagged the Zacks Consensus Estimate of $1.92 billion by 2.1%.

Adjusted gross profit dropped 4.9% due to lower volume/mix and the loss of U.S. canned milk profits.  Lower net price realization was partially offset by a reduction in commodity and manufacturing overhead costs.

Adjusted operating profit declined 6.2% due to lower selling, distribution, and administrative expenses. Excluding gains related to the divested U.S. canned milk business, adjusted operating income increased 3%.

Coming to the share price movement, Smucker’s shares have increased 7.7% in the past one year, clearly underperforming the Zacks categorized Food–Miscellaneous/Diversified industry, which grew 10.4%.

Segment Performance

U.S. Retail Coffee Market: The company's biggest segment, U.S. Retail Coffee Market, reported a 7% slump in sales to $537.6 million. This was primarily due to lower volume/mix and lower volume for the Folgers brand, partially offset by gains for the Dunkin' Donuts and Café Bustelo brands. Lower net price realization reduced net sales by 1%. 

Segment profit declined 12% to $172.2 million, due to the negative impact of volume/mix, lower net pricing, and higher commodity costs.

U.S. Retail Consumer Foods: This segment’s sales plunged 9% to $517.3 million due to the U.S. canned milk divestiture. Excluding the impact of the divestiture, net sales decreased 2%. The decline reflected unfavorable volume/mix, partially offset by slightly higher net price realization.

Segment profit fell 8% to $119.2 million, primarily due to the loss of U.S. canned milk profits. Excluding the divested U.S. canned milk business, segment profit increased 26%, reflecting lower manufacturing overhead costs, higher net pricing, and reduced marketing expense.

U.S. Retail Pet Foods: Segment net sales were $550.9 million in the quarter, which represented a 4% year-over-year decline, due to lower net price realization. Volume/mix was neutral as gains for Nature's Recipe and Kibbles 'n Bits dog food were offset by declines in pet snacks.

Segment profit increased 2% to $126.3 million as lower marketing expense and incremental synergy realization more than offset lower volume/mix.

International and Foodservice: Net sales in the International and Foodservice segment increased 6% from the prior-year quarter to $273.0 million, as lower net price realization and the divested U.S. canned milk business was somewhat offset by favorable volume/mix.

Segment profit fell 7% to $45.5 million, due to the impact of the divested business.

Financials

J.M. Smucker ended the quarter with cash and cash equivalents of $139.6 million, long-term debt of $4.95 billion and total shareholders’ equity of $7.24 billion.

Fiscal 2017 Outlook

Management expects top-line softness in the business and across the industry to negatively impact the company’s growth, despite the accelerated realization of synergies and efforts to reduce costs.

That said, the company provided a weak outlook. J.M. Smucker now envisions fiscal 2017 earnings in the range of $7.60−$7.70 per share, in comparison from $7.60−$7.75 per share expected previously. Further, management expects net sales to decrease 5%, wider than the 2−3% decline from fiscal 2016 expected previously, reflecting the impact of U.S. canned milk divestiture.

Excluding the impact of the divestiture, net sales are expected to decline 3% in fiscal 2017, down from the range from flat to down 1% expected previously. The change from previous guidance reflects reduced U.S. Retail Coffee segment net sales results in the third quarter and forecasted sales in the fourth quarter. 

Management continues to expect capital expenditure of about $240 million in the fiscal year, wherein it anticipates generating free cash flow in the range of $950 million to $1 billion, as compared to $1 billion expected previously.

Zacks Rank & Key Picks

J.M. Smucker currently carries a Zacks Rank #4 (Sell). Some better-ranked food stocks in the industry include Lamb Weston Holdings Inc. (LW - Free Report) , Ingredion, Inc. (INGR - Free Report) and Campbell Soup Co. (CPB - Free Report) .

Lamb Weston has long-term earnings growth rate of 3.24% and sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Campbell and Ingredion, both carrying a Zacks Rank #2 (Buy), have growth rates of 5.56% and 11.00%, respectively.

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