The J. M. Smucker Company (SJM - Free Report) , a leading manufacturer of food products, posted disappointing first-quarter fiscal 2018 results wherein both earnings and revenues lagged estimates. Further, the company slashed its earnings guidance for fiscal 2018.
Adjusted earnings in the first quarter came in at $1.51 per share, which were way behind the Zacks Consensus Estimate of $1.61 by 6.2%. Earnings also declined 19% year over year, due to lower revenues and decline in gross profits, which were negatively impacted by planned increases in marketing expense and commodity costs.
Revenue and Margin Details
Net sales in the quarter declined 4% year over year to $1.749 billion. The fall was due to lower volume/mix, notably in coffee and oils, which were partially offset by gains in pet food. Net pricing added 1 percentage point to net sales, as higher net pricing for coffee and the Smucker's brand was partially offset by lower net pricing within the company's U.S. Retail Pet Foods segment. Currency negatively impacted sales by $1.8 million. Net sales also lagged the Zacks Consensus Estimate of $1.816 billion by 3.7%. Notably, sales have posted negative surprises in five out of the last seven consecutive quarters.
Adjusted gross profit fell 10% due to lower volume/mix, higher costs and unfavorable pricing. Despite cost-saving initiatives, the company’s adjusted operating profit declined 17% due to lower gross profits.
The weakness in sales and earnings is well reflected in the company’s share price movement. Smucker’s shares have decreased 15.7% in the last six months, in comparison to the industry, which declined just 4.6% in the same time frame. On the contrary, the broader Consumer Staple sector grew 3.6% in the last six months.
U.S. Retail Coffee Market: The company's biggest segment, U.S. Retail Coffee Market, reported a 6% decline in sales to $480.8 million. This was primarily due to 8% lower volume/mix driven by lower volume for the Folgers brand, partially offset by gains for the Dunkin' Donuts and Café Bustelo brands. The lower volume/mix was mostly offset by 2% higher net price realization.
Segment profit declined 29% to $123.8 million, due to the negative impact of volume/mix, lower net pricing and higher commodity costs. Encouragingly, the company anticipates the impact of higher costs to moderate throughout the remainder of the fiscal 2018.
U.S. Retail Consumer Foods: This segment’s sales declined 8% in the quarter to $492.4 million. Higher net price realization, driven by the Smucker's and Crisco brands, added 3% to the sales, but was offset by 11% lower volume/mix, primarily attributed to the Crisco, Pillsbury and Smucker’s brands.
Segment profit was flat at $110.9 million as the impact of lower volume/mix was offset by higher pricing and reduced marketing expense.
U.S. Retail Pet Foods: Segment net sales were almost flat at $521.7 million in the quarter, as improved volume/mix, primarily related to the Nature's Recipe and Natural Balance brands was mostly offset by lower net price realization across the portfolio. Segment profit declined 20% to $98.3 million due to decline in sales, lower pricing, higher commodity costs as well as higher marketing expense.
International and Away from Home: Effective May 1, 2017, the company's U.S. Foodservice business was renamed Away From Home.
Net sales of the segment increased 3% from the prior-year quarter to $254.0 million, reflecting favorable volume/mix driven by the Jif and Smucker's brands. Net price realization improved, but was offset by currency headwinds. Segment profit declined 3% to $38.3 million as top-line growth were more than offset by unfavorable currency, higher commodity costs, and expenses related to the construction of the Smucker's Uncrustables production facility in Longmont, Colorado.
J.M. Smucker ended the quarter with cash and cash equivalents of $183.2 million, long-term debt of $4.45 billion and total shareholders’ equity of $6.93 billion. At the end of Jul 31, the company had cash flow from operations of $304.3 million, while capital expenditure of $69.6 million. As a result, it generated free cash flow of $234.7 million.
Fiscal 2018 Outlook
Following the dismal first quarter results, J. M. Smucker lowered its earnings guidance and now envisions fiscal 2018 earnings in the range of $7.75−$7.95 per share, compared with $7.85−$8.05 expected earlier. The company also anticipates lower pricing in U.S. Retail Coffee to negatively impact profits in the remainder of fiscal 2018.
Management however continues to expect capital expenditure of about $310 million in fiscal 2018, wherein it anticipates to generate free cash flow of about $775 million.
Zacks Rank & Key Picks
J.M. Smucker currently carries a Zacks Rank #3 (Hold).
Some better-ranked food stocks in the industry are Post Holdings Inc. (POST - Free Report) , Ingredion, Inc. (INGR - Free Report) and The Chefs' Warehouse Inc. (CHEF - Free Report) .
Post Holdings has an average positive earnings surprise of 11.32% and sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Ingredion has an average positive earnings surprise of 4.98%, while Chef’s Warehouse has an average positive earnings surprise of 0.08%.
Both Ingredion and Chef’s Warehouse carry a Zacks Rank #2.
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