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Can Savings & Buyouts Aid Smucker (SJM) Revive Lost Sheen?

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The J. M. Smucker Company (SJM - Free Report) has been sailing on troubled waters lately, thanks to mounting SG&A expenses, freight costs and lower net price realization. In fact, such deterrents have eclipsed the company’s shares, which have declined almost 17% in the past six months, versus the industry’s 2.7% rise. Nevertheless, this Zacks Rank #3 (Hold) company has been managing to survive on the back of acquisition gains and strong brand performances. Additionally, the company focuses on enhancing savings through improved cost management.

Strategies to Strengthen Portfolio

Smucker boasts a strong brand portfolio with popular brands like Smucker's, Nature's Recipe, Dunkin' Donuts, Uncrustables, Jif, Meow Mix and 9Lives among others. Smucker's Uncrustable brand has been doing well with net sales improving 15% in fiscal 2018, marking its 4th consecutive year of double-digit growth. In order to augment the capacity of the brand, the company is constructing a frozen sandwich plant in Colorado, which is expected to increase net sales to more than $500 million in the next 5 years. Smucker is also focused on brand building through product innovation.

Further, acquisitions and partnerships are a lucrative platform for the company to augment revenues and broaden portfolio. In fact, the Ainsworth buyout aided year-on-year top-line growth during the first quarter of fiscal 2019. This deal has particularly strengthened the company’s pet foods category. Apart from Smucker, General Mills (GIS - Free Report) has also been striving to expand in this category and concluded the acquisition of Blue Buffalo Pet Products, Inc. Coming back to Smucker, other notable business acquisitions include Big Heart Pet Brand, Sahale Snacks, Enray Inc as well as coffee brands and business operations of Rowland Coffee among others.

The company also gains from the agreement with Keurig Green Mountain and Dunkin’ Brands Group, Inc, to manufacture and sell the K-Cup category of products.  This agreement has been yielding positively since fiscal 2016. Undoubtedly, such well-chalked agreements and buyouts have added iconic brands to the company’s portfolio and strengthened presence in the United States.



 

Saving Initiatives

Smucker resorts to cost savings to fuel investments and enhance operations. Based on such efforts and expected gains from the recent K-Cup partnership, Smucker achieved cost savings of $100 million in fiscal 2018. Moreover, the company expects to realize savings worth $80 million in fiscal 2019 from improved K-Cup manufacturing cost, while the remaining $70 million of its targeted savings of $250 million will be realized in 2020.

Wrapping Up

We note that Smucker has been bearing the brunt of higher freight expenses. As a result, gross margin contracted 40 basis points to 36.8% in the first quarter of fiscal 2019. Further, the company expects freight headwinds to persist in fiscal 2019, which is a threat to margins. Apart from Smucker, other food companies such as United Natural Foods (UNFI - Free Report) and McCormick & Company (MKC - Free Report) have also been grappling with rising freight expenses.

Additionally, Smucker’s profitability has been eclipsed by higher SG&A expenses. Apart from these, lower net price realization has been weighing on segments’ performance.

Nevertheless, we expect that the company’s well-chalked savings initiatives and efforts to widen revenue prospects will help tide over the aforementioned headwinds. Moreover, we expect such efforts to boost investor’s optimism in the 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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