Gains from buyouts and alliances along with a focus on innovation and digital advancements bode well for The J. M. Smucker Company (SJM - Free Report) despite lower net price realization and the U.S. baking business divestiture. We believe that such upsides are likely to help the company drive the top line. Also, the company’s bottom line has been rising year over year, thanks to a solid cost-saving plan.
Smucker’s Sales Under Pressure
Smucker has been witnessing drab sales for a while. In third-quarter fiscal 2020, net sales amounted to $1,972.3 million that missed the consensus mark of $1,973 million. Moreover, the top line dropped 2% year over year, mainly due to lower volume/mix in the U.S. Retail Pet Foods segment. Further, reduced net price realization in other segments is a deterrent. This led to a negative impact of 5 percentage point in the U.S. Retail Coffee Market unit’s revenues. The same also put pressure on the company’s International and Away From Home segment. Persistence of such headwinds is concerning.
Apart from this, the divestiture of the U.S. baking business has been leading to unfavorable year-over-year comparisons on Smucker’s top line. Moreover, this is expected to weigh on the company’s performance in fiscal 2020. In fact, management issued a drab sales outlook for the year. The company expects net sales to decline 3% year over year. The top-line view includes a loss of $105.9 million stemming from the divestiture of the U.S. baking business and $25.4 million from non-comparable sales associated with Ainsworth.
Nonetheless, Smucker continues to make concerted efforts to improve the top line.
Factors Likely to Support the Stock
We note that the company’s acquisition of Ainsworth (completed in May 2018) has been aiding the performance of the U.S. Retail Pet Foods category. Other noteworthy acquisitions of the company include Big Heart Pet Brand (pet food maker), Sahale Snacks (branded nut and fruit snacks maker), Enray Inc. (manufacturer of organic, gluten-free ancient grain products), and coffee brands and business operations of Rowland Coffee, among others. Additionally, Smucker’s agreement with Keurig Green Mountain (KGM) and Dunkin’ Brands to manufacture and sell the K-Cup category of products has been yielding results since fiscal 2016.
Evidently, Dunkin’ Brand grew 4% in third-quarter fiscal 2020. Also, the company has been consistently extending the partnership with KGM to augment K-Cup business opportunities. Notably, Smucker reported 7% sales growth for all K-Cup brands in the third quarter. Apart from this, the company is accelerating marketing support for growth brands. Further, Smucker has effectively launched advertising campaigns for ten brands in fiscal 2020. Additionally, the growing trend of online customers has urged the company to take notice of its e-commerce channel to boost sales. Notably, during third-quarter fiscal 2020, e-commerce sales improved double digits and contributed 5% to total U.S. retail sales.
Further, the company has been performing well on the bottom-line front, courtesy of its robust saving efforts. In fiscal 2019, the company delivered savings of nearly $30 million through the right-spend program. Going ahead, management is focused on cost reduction and optimization efforts to ensure greater profitability. Markedly, SD&A costs are expected to decline nearly 2.5% year over year in fiscal 2020.
Shares of this Zacks Rank #3 (Hold) company have gained 6.4% in the past three months against the industry’ s decline of 9.3%.
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