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Smucker's (SJM) Q4 Earnings Top Estimates, Buyout Boosts Sales

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The J. M. Smucker Company (SJM - Free Report) delivered fourth-quarter fiscal 2019 results, with the top and the bottom line improving year on year. Earnings also beat the Zacks Consensus Estimate, while sales missed the same.

The company’s quarterly performance primarily benefited from the Ainsworth buyout, while the core brands continued to depict growth. However, the divestiture of the U.S. baking business weighed on the results. Additionally, management provided view for fiscal 2020.

Quarter in Detail

Adjusted earnings of $2.08 per share improved nearly 8% year over year and beat the Zacks Consensus Estimate of $1.97.

Net sales of the company amounted to $1,902.1 million, which missed the consensus mark of $1,937 million. Nevertheless, the top line increased nearly 7% year over year, mainly driven by the Ainsworth buyout and gains from the company’s growth brands. Notably, the Ainsworth acquisition contributed $200.8 million during the quarter. These upsides were partially offset by impacts from non-comparable net sales in the year-ago quarter, stemming from the divestiture of the U.S. baking business.

Excluding items that impact comparability, the top line declined by almost $5 million, due to unfavorable currency rates. Reduced net price realization dragged sales by almost 3 percentage points.

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

Adjusted gross profit jumped 7% to $721.6 million and adjusted gross margin remained flat year-on-year at 37.9%. Adjusted operating income inched up 0.3% to $353.3 million, though the adjusted operating margin contracted 120 basis points (bps) to 18.6%.

Segment Performance

U.S. Retail Coffee Market: The company's U.S. Retail Coffee Market segment sales came in at $526.3 million, which grew 4% from the prior-year quarter’s figure. This was backed by favorable volume/mix across most brands, especially double-digit rises in Dunkin Donuts and Cafe Bustelo. This was somewhat countered by reduced net price realization.

Profit in the segment rose 10% to $170.5 million on improved volume/mix and lower input costs. These were countered by escalated marketing costs.

U.S. Retail Consumer Foods: Sales in the segment declined 15% to $393.6 million, thanks to the divestiture of the baking business. On excluding the non-comparable results, sales in the segment inched up 1%, courtesy of improved volume/mix.

Profit in the segment plunged 31% to $78.6 million, mainly due to the divestiture of the U.S. baking business. Excluding this, profit declined $23.5 million on account of the net impact stemming from lower pricing and input costs.

U.S. Retail Pet Foods: Net sales rallied 35% to $721.2 million, owing to contributions from the Ainsworth buyout. Excluding the impacts from this buyout, sales in the segment declined, owing to discontinuation of certain private label businesses and Gravy Train products. Volume/mix remained unfavorable, whereas net price realization was neutral.

Segment profit jumped 29% to $131.2 million, supported by gains from Ainsworth. Excluding this buyout, profit in the segment declined owing to increased input costs and marketing expenses. These were partially negated by favorable volume/mix and SD&A expenses.

International and Away from Home: Net sales fell 7% from the prior-year quarter’s figure to $261 million, thanks to lower net price realization, currency headwinds, adverse volume/mix and impacts from the divestiture of the U.S. baking business. Segment profit went down 10% to $45.9 million, owing to lower sales, currency woes and cost stemming from the construction of Longmont facility.

Financials

Smucker exited the quarter with cash and cash equivalents of $101.3 million, long-term debt (less current portion) of $4,686.3 million and total shareholders’ equity of $7,970.5 million. Cash flow from operations amounted to $274.2 million in the quarter and free cash flow totaled $181.6 million.

Growth Efforts & Fiscal 2020 Outlook

Management is optimistic about the progress made during fiscal 2019. The company’s core brands continued to perform well along with the successful integration of Ainsworth. Going ahead, management plans to focus on cost reduction and improving productivity. These factors along with efforts to keep pace with consumers evolving preferences bode well for this Zacks Rank #3 (Hold) company.

Further, the company provided outlook for fiscal 2020. It expects net sales to increase in the range of 1-2%. Top-line view includes loss of $105.9 million stemming from the divestiture of the U.S. baking business and noncomparable sales associated with Ainsworth. On a comparable basis, sales are projected to improve more than 2%.  

Adjusted earnings are anticipated in the band of $8.45-$8.65, reflecting an improvement from $8.29 in fiscal 2019. The bottom line is expected to gain from improved sales and gross profit margin as well as lower effective tax rate.

Additionally, free cash flow is projected in the range of $875-$925 million and capital expenditures are expected in the band of $300-$320 million.



Price Performance

The company’s shares gained 22.9% in the past three months compared with the industry’s rise of 6.8%.

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