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Can Smucker's Focus on Buyouts & Innovation Uplift Stock?

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The J. M. Smucker Company (SJM - Free Report) has been gaining from its effective brand strengthening and cost management efforts. Additionally, the company has been focusing on innovations and undertaking strategic acquisitions to bolster market share. However, persistent rise in freight expenses has been hurting the company’s margins, raising concerns for management. That said, let’s take a closer look at the aspects impacting Smucker’s performance.

Strategies to Strengthen Brand Portfolio

The food industry is rife with competition and shifting consumer preferences. Amid this scenario, companies like Smucker and United Natural Foods (UNFI - Free Report) often resort to strategic tie-ups to augment their offerings and stay afloat. Smucker actively pursues strategic acquisitions in the United States as well as overseas. Its agreement with Keurig Green Mountain and Dunkin’ Brands Group to manufacture and sell the K-Cup category of products has been yielding positive results since fiscal 2016. Additionally, the company has formed key partnerships with coffee companies like Rowland Coffee along with other food brands such as Sahale Snacks and Enray Inc. amongst others.

Speaking of acquisitions, Smucker has been expanding in the pet foods category. Consumers’ rising consciousness regarding the health and wellness of pets has been giving much impetus to companies to grow in this category. Recently, the company concluded the acquisition of Ainsworth Pet Nutrition, LLC., a renowned name in the premium pet foods segment with popular brands like Rachael Ray Nutrish, Well, this is not the first time that Smucker has undertaken strategic efforts to strengthen its footing in pet foods. In 2015, it acquired Big Heart Pet Brand that added iconic brands such as Meow Mix and Kibbles 'n Bits. Apart from Smucker, General Mills Inc. (GIS - Free Report) has also been striving to expand in this category and recently concluded the acquisition of Blue Buffalo Pet Products, Inc. In fact, Amazon (AMZN - Free Report) is also planning to foray in this category, evident from its recent launch of the Wag brand.

Apart from these, the company focuses on brand building through product innovation. The company’s recent launches include Dunkin' Donuts Cold Brew Coffee and Meow Mix Servings cat food. These introductions contributed significantly toward sales growth during the third quarter of fiscal 2018. In fact, management stated that products launched over the past three years delivered net sales growth of nearly 7% during the third quarter. Additionally, the company plans to introduce Milk-Bone Puffs dog treats and Dunkin' Donuts coffee canisters by the end of fiscal 2018.

Well, Smucker’s dedicated efforts to augment brand strength are reflected in third-quarter fiscal 2018 results. In the said period, Smucker witnessed growth across most core brands and categories. Going ahead, we expect that the company’s continued focus on brand building will add more colors to its performance.



 

Hurdles yet to be Crossed

Smucker continues to bear the brunt of higher freight expenses, which hurt its margins in the third quarter. In fact, management stated that the freight costs were greater than anticipated, thanks to a difficult transportation landscape in the United States. The company expects these headwinds to linger in the fourth quarter, which along with charges related to inventory obsolescence compelled it to lower gross margin view.  Additionally, lower net price realization dampened Smucker’s performance in several segments during the third quarter. Such persistent hurdles are a threat to Smucker’s performance. Well, such deterrents have dragged the company’s shares by almost 13.2% in the past three months, compared with the industry’s decline of 9.2%.

Nevertheless, the company has put into place stringent cost saving measures, which is expected to aid savings worth $100 million in fiscal 2018, which forms part of its targeted savings of $250 million for 2020. Also, we are encouraged by Smucker’s efforts to boost the top line through brand development. We hope that such endeavors will uplift investors’ optimism in this Zacks Rank #3 (Hold) stock in the forthcoming periods.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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