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Smucker (SJM) Misses on Q1 Earnings & Sales, Trims '19 View

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The J. M. Smucker Company (SJM - Free Report) reported first-quarter fiscal 2019 results, with earnings and sales improving year on year. Sales in the quarter were mainly driven by the Ainsworth acquisition. Additionally, some of the company’s key brands continued to perform well.

Nevertheless, the top and the bottom line fell short of the Zacks Consensus Estimate in the reported quarter. Further, the company lowered fiscal 2019 outlook, to reflect impacts of the U.S. baking business divestiture. This seems to have marred investors’ optimism in the stock, which lost almost 3.2% during the pre-market trading session on Aug 21.

In fact, the company’s shares have dropped 5.5% in the past six months compared with the industry’s 0.9% decline.



 

Quarter in Detail

Adjusted earnings of $1.78 per share rose almost 18% year over year, but missed the Zacks Consensus Estimate of $1.81. The bottom line includes unfavorable impacts of 7 cents from accounting adjustments related to Ainsworth inventory.

Net sales of this Zacks Rank #3 (Hold) company increased close to 9% year over year to reach $1,902.5 million, driven mainly by the Ainsworth buyout. Notably, the acquisition contributed $162.8 million during the quarter. Nevertheless, sales missed the consensus estimate of $1,945 million.

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

Excluding the Ainsworth acquisition, the top line declined 1% due to lower net price realization across oil, coffee and pet food categories, somewhat compensated by higher net pricing in peanut butter.

Adjusted gross profit climbed approximately 8% to $700.2 million, whereas adjusted gross margin expanded 40 basis points (bps) to 36.8%. Adjusted operating income increased roughly 5% to $317.1 million, while adjusted operating margin declined 60 bps to 16.7%.

Segment Performance

U.S. Retail Coffee Market: The company's U.S. Retail Coffee Market segment sales came in at $489.5 million, which increased 2% from the prior-year quarter’s tally. This was backed by favorable volume/mix, primarily attributable to Dunkin' Donuts and Cafe Bustelo brand. However, the factors were somewhat countered by declines in the Folgers brand and ground coffee.

Segment profit jumped 12% to $147.8 million owing to lower input costs, somewhat negated by escalated marketing costs.  

U.S. Retail Consumer Foods:  Sales in the segment dipped 1% to $483.3 million. Excluding the baking business, net sales were flat year over year, as gains stemming from volume/mix for Uncrustables and Smucker’s brands were partially countered by declines in Jif.

Segment profit fell 12% to $97.3 million, thanks to increased freight and input costs, adverse volume/mix and higher marketing expenditures.

U.S. Retail Pet Foods: Net sales increased 29% to $671.2 million owing to contributions from the Ainsworth buyout. Excluding the impacts from this buyout, sales in the segment declined 2% due to lower net price realization and lower volume/mix.

Segment profit increased 3% to $100.4 million, supported by gains from Ainsworth. Excluding this buyout, profit in the segment declined due to unfavorable pricing and costs, partially offset by lower marketing expenses.

International and Away from Home: Net sales dipped 1% from the prior-year quarter’s tally to $258.5 million, owing to lower net price realization. Segment profit rose 8% to $49.6 million, owing to reduced marketing expenses as well as benefits from reduced pricing and costs.

Financials

Smucker exited the quarter with cash and cash equivalents of $192 million, long-term debt of $6,184.9 million and total shareholders’ equity of $7,930.8 million. Cash flow from operations amounted to $243 million in the quarter, while the company generated free cash flow of $141.7 million.

Fiscal 2019 Outlook

The company is impressed with the performance of its pet foods business in the first quarter that gained from the Ainsworth acquisition, which in turn drove overall performance. Further, the company’s coffee business continued to perform well, backed by effective strategies. Smucker also remains on track with its cost-containment plans, directed toward expanding margins and support investments.

Further, management stated that the divestiture of U.S. baking business is expected to be completed by the end of August, 2018, and expects net proceeds of $315 million. Further the company has lowered its fiscal 2019 sales and earnings view due to impacts of this divestiture.

Accordingly, the company expects net sales for fiscal 2019 at $8 billion, lower than its prior forecast of $8.3 billion. In addition to the impacts from the baking business divestiture, top-line projections were trimmed to reflect the lower than anticipated sales reported in the first quarter. Further, the company envisions fiscal 2019 earnings in the range of $8.40-$8.65 down from the prior view of $8.40-$8.65 per share.

Additionally, free cash flow is projected in the range of $770-$820 million compared to the earlier view of $800-$850 million, to reflect forgone profits connected with the divestiture. Capital expenditures are continued to be expected in the range of $350-$370 million in fiscal 2019.

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