Smucker Lags, Lowers Outlook - Analyst Blog

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The J.M. Smucker Company ( SJM ) delivered third-quarter 2012 adjusted earnings of $1.22 per share, lagging behind the Zacks Consensus Estimate of $1.41 and the prior-year quarter's earnings of $1.27 per share.

The sluggish result in the quarter was led by greater-than-anticipated decline in the overall sales volume, despite robust sales growth.

Adjusted earnings exclude restructuring and merger and integration costs ('special project costs') of 19 cents and 16 cents per share in the third-quarter of 2012 and 2011, respectively.

However, the results in the quarter continue to include the operations of Rowland Coffee Roasters Inc. after the completion of the acquisition on May 16, 2011, and the North American foodservice coffee and hot beverage business acquired from Sara Lee Corporation ( SLE ) on January 3, 2012.

The adjusted earnings also include the impact of an $11.3 million loss on the sale of business in the first nine months of 2012, and a noncash impairment charge of $17.2 million in the third quarter and first nine months of 2011.

Revenue Details

Net sales in the quarter increased 12% year over year to $1.47 billion, due to pricing actions and the impact of acquisitions. The Zacks Consensus Revenue Estimate was $1.50 billion. The positive growth in net sales was helped by the acquisition impact of the Rowland Coffee brands and the Sara Lee business, which contributed approximately 5% to net sales.

In addition, the overall sales mix was favorably impacted by the K-Cups.

However, the shipments declined by 8% in the quarter, while the overall sales volume was very disappointing, and plummeted 10% in the reported quarter, driven by Crisco shortening and oils, Folgers coffee, and Jif peanut butter.

In addition, higher retail price points in the quarter, slowdown in the levels of key retailers managed inventory, increased consumer pantry loading of peanut butter during the second quarter of 2012, and specific competitive activities and price points in certain of the company's categories contributed to the decline.

Expense and Margin Performance

Excluding project costs, gross margin contracted 480 basis points (bps) to 32.6% in the third-quarter 2012 on the back of lower sales volume and higher costs for green coffee, edible oils, peanuts and flour.

Selling, distribution and administrative ('SD&A') expenses climbed 5% year over year. However, it declined 100 bps to 15.3% as a percentage of net sales. The acquisition of the Rowland Coffee and Sara Lee businesses contributed over 70% of the overall increase in SD&A expenses.

The quarter also experienced higher amortization expenses, related to the intangible assets associated with the company's recent acquisitions. Marketing expenses also rose 4% in the third-quarter of 2012.

Excluding the impact of the project costs, operating income decreased 3.0% while operating margin contracted 250 basis points to 15.9%.

Segment Performance

The company's biggest segment, U.S. Retail Coffee Market , reported a robust 15% increase in sales to $637.9 million, aided by price increases over the last 12 months. Volume decreased 11% in the third quarter of 2012, excluding Rowland Coffee. The acquisition of Rowland Coffee contributed approximately $28.5 million to segment net sales.

The U.S. Retail Consumer Foods segment's sales soared 7% to $556.5 million, while volumes declined 11%.

Net sales in the International, Foodservice and Natural Foods segment, excluding the impact of acquisitions, divestiture and foreign exchange, increased 5% over the same period, owing to price increases and favorable sales mix, which more than offset the volume declines.

Other Financial Updates

At the end of January 31, 2012, Smucker had cash and cash equivalents of $370.4 million compared with $549.6 million at the end of January 31, 2011.

Cash flow provided from operating activities was $409.3 million, compared with $374.8 million in the same period of 2011.

On January 30, Smucker's Board has announced to pay its shareholders a quarterly dividend of 48 cents per share on March 1, 2012, of record at the close of business on February 10, 2012.

In addition, Smucker's board has increased the share repurchase authorization of the company by five million shares. Currently, Smucker has approximately two million shares remaining for repurchase under its January 2011 authorization.

During the third quarter, Smucker repurchased 555,700 shares for approximately $41.1 million.  As of January 31, 2012, the company had 6.9 million common shares remaining for repurchase under its Board authorization, including 5 million additional common shares authorized by the Board during its January 2012 meeting.

Acquisition Update

Smucker has recently acquired the North American foodservice coffee and shot beverage business from U.S. package-food company Sara Lee. Smucker will make an upfront payment of $350 million in cash for the purchase and has agreed to pay $50 million to Sara Lee through the next 10 years. The deal was announced in October 2011.

With the acquisition, Sara Lee's liquid coffee concentrate brand Douwe Egberts will be added to Smucker's portfolio. Smucker has also attained the right to license the Cafitesse and Pickwick brands.

Moreover, subsequent to the acquisition, 450 Sara Lee employees will be shifted to the Ohio-based J.M. Smucker plant. Smucker expects the newly acquired business to contribute approximately $100 million to the company's net sales in 2012.

Outlook

Following the soft third-quarter results, the company has lowered its sales and earnings guidance for fiscal 2012.

For fiscal 2012, Smucker now expects its net sales to be at $5.5 billion, up approximately 15% over the prior-year period, reflecting the expected net sales contribution from the Sara Lee business.

The fiscal 2012 adjusted earnings, excluding special project costs of 65 cents to 70 cents per share, is expected to range from $4.60 to $4.65, down from the previous estimate of $4.90 to $5.00 per share.

Currently, Smucker, which faces stiff competition from ConAgra Foods Inc. ( CAG ) and Kraft Foods, Inc. ( KFT ), has a Zacks #2 Rank, implying a short-term Buy recommendation.


 
CONAGRA FOODS ( CAG ): Free Stock Analysis Report
 
KRAFT FOODS INC ( KFT ): Free Stock Analysis Report
 
SMUCKER JM ( SJM ): Free Stock Analysis Report
 
SARA LEE ( SLE ): Free Stock Analysis Report
 
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Business , Stocks

Referenced Stocks: CAG , KFT , SJM , SLE

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