A dismal sales trend has placed The J. M. Smucker Company (SJM - Free Report) in hot waters. This Zacks Rank #4 (Sell) stock has lost 11.2% in the past six months against the industry’s growth of 4.3%. Also, Smucker has underperformed the Zacks Consumer Staples sector, which has gained 3.1% in the same time frame.
Smucker has been witnessing a year-over-year decline in sales for quite some time now. In fact, the Zacks Consensus Estimate for third-quarter and fiscal 2020 sales also call for declines of about 2% and 3.1% to $1.97 billion and $7.59 billion, respectively. Moreover, the consensus marks for earnings per share in the third quarter and fiscal 2020 are pegged at $2.22 and $8.15, suggesting year-over-year drops of 1.8% and 1.7%, respectively. Let’s delve deeper.
Soft Sales & View Hurt Smucker
Smucker’s top line has been hurt by lower net price realization for the last few quarters. During the second quarter of fiscal 2020, reduced net price realization dented the company’s top line (excluding items that impact comparability) by 1 percentage point. The same also put pressure on the company’s U.S. Retail Coffee and U.S. Retail Consumer Foods. Persistence of such headwinds is concerning.
Further, the divestiture of the U.S. baking business has been leading to unfavorable year-over-year comparisons on Smucker’s top line. We note that during the second quarter, the company’s top line dropped 3.2% year over year mainly due to the divestiture of the U.S. baking business. In fact, the same had a negative impact on the performance of International, Away from Home and U.S. Retail Consumer Foods.
Unfavorable comparisons stemming from the U.S. baking business divestiture are expected to put pressure on the company’s performance in fiscal 2020. This is evident from management’s drab sales outlook, which includes a loss of $105.9 million stemming from the divestiture of the U.S. baking business and non-comparable sales associated with Ainsworth. Apart from this, volatility in exchange rates poses a threat to Smucker due to its significant exposure to international markets. During the second quarter, adverse impacts of foreign exchange affected the International Away From Home segment by nearly $1.8 million.
In its last earnings call, Smucker curtailed its sales and earnings guidance for fiscal 2020. Management now expects net sales to fall 3% compared with the previous guidance of flat to 1% growth. On a comparable basis, sales are now projected to decline 2% compared with flat to 1% increase expected earlier. Adjusted earnings per share are now anticipated in the range of $8.10-$8.30, down from $8.35-$8.55 projected earlier. The bottom line is likely to be affected by reduced contributions from sales, while a 2% anticipated decline in SD&A costs is likely to offer some respite.
Factors Offering Respite
Smucker has been focused on achieving cost savings to fuel investments and enhance operating performance. To this end, the company generated savings of nearly $30 million through the right-spend program in fiscal 2019. Continuation of such trends is likely to offer some respite to Smucker. Additionally, the company is expected to receive some cushion from its yielding buyouts (like Ainsworth), alliances, constant innovation and focus on digital operations.
Nevertheless, it remains to be seen to what extent these upsides can protect Smucker and help it get back on growth trajectory.
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