Smucker Beats on Earnings with Favorable View - Analyst Blog

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The J.M. Smucker Company ( SJM ), a leading manufacturer of food products, reported fourth-quarter fiscal 2014 adjusted earnings (excluding special project costs) of $1.21 per share, which declined from the prior-year adjusted earnings of $1.29 per share by 6% despite benefiting from lower share count owing to share buybacks.

The year-over-year decline in earnings was due to lower operating income and the impact of a higher effective tax rate, partially offset by benefits from other income and lower interest expense. Earnings, however, exceeded the Zacks Consensus Estimate of $1.16 by 4.3%.

Revenue and Margin Details

Net sales in the fourth quarter declined 8% year over year to $1.234 billion. The results slightly lagged the Zacks Consensus Estimate of $1.236 billion. The decline was due to an 8% decrease in net price realization in response to lower commodity costs realized during the year, largely in retail and foodservice coffee. The price decline in the fourth quarter was higher than 6% in the third quarter.

In addition, volume gains realized in Crisco oils, Folgers coffee and the company's flour brands were offset by declines in Pillsbury baking mixes and frosting and the negative impact of the previously announced exit of portions in International, Foodservice, and Natural Foods segments. Also, unfavorable sales mix and foreign exchange reduced net sales by 2% and 1%, respectively in the quarter.

The acquisition of Enray Inc (Aug 2013) and the impact of the company's licensing and the distribution agreement with Cumberland Packing Corp., which commenced on Jul 1, 2013 also added a combined $22.4 million to fourth quarter sales.

However, these positives could not offset the price declines in retail and foodservice coffee. Excluding acquisition, distribution agreement and currency impact, sales declined 9% to $1.221 billion in the quarter.

Adjusted gross profit declined 8% to $443 million. Adjusted gross margin contracted 20 basis points (bps) to 35.9% due to lower net price realization, most significantly in retail and foodservice coffee, which offset lower input costs primarily that of coffee, peanuts, flour and oils. Also, the addition of Enray and Cumberland was offset by the impact of the exited businesses.

Adjusted operating profit declined 11.2% to $199.9 million whereas adjusted operating margin shrank 60 bps to 16.2%, primarily due to an increase in selling expenses during the quarter.

Segment Performance

U.S. Retail Coffee Market: The company's biggest segment, U.S. Retail Coffee Market, reported a 12% decline in sales to $473.5 million mainly due to the impact of price decline. Net sales of K-cups declined 10%, while volumes improved 1% driven by the Folgers and Dunkin' Donuts packaged coffee brands.

The segment's operating margin expanded 50 bps to 28.1% in the quarter owing to lower green coffee costs and decreased marketing and other expenses.

U.S. Retail Consumer Foods: U.S. Retail Consumer Foods segment sales declined 4% to $465.8 million reflecting lower net price realization primarily in the Crisco and Jif brands. Segment volumes increased 3% on the back of higher volumes of Smucker's Uncrustables frozen sandwiches, Crisco brands and canned milk, which offset the volume declines of Smucker's fruit spreads and Pillsbury brand. Jif brand posted flat volumes in the quarter.

Segment profit margin expanded 200 bps to 20.6% in the quarter, primarily due to lower commodity costs, primarily for peanuts, oils, and flour and a decrease in marketing expenses, which offset lower net price realization and increase in manufacturing costs.

International, Foodservice and Natural Foods: Net sales in the International, Foodservice and Natural Foods segment declined 7% from the previous-year quarter to $295 million. Excluding the impact of the acquired Enray business, the Cumberland distribution agreement and foreign exchange, segment net sales decreased 12% from the prior-year period.

The sales decline was due to the divestiture of the company's hot beverage and Smucker's Uncrustables frozen sandwich businesses, an unfavorable mix and higher trade spending related to the company's foodservice hot beverage business. Segment volume declined 3%, excluding the acquisition impact, as increases in the Robin Hood and Five Roses brands in Canada were more than offset by the impact of the exited foodservice businesses.

The segment's profit margin contracted 480 bps to 10.7% in the reported quarter due to increased foodservice trade spending. In addition, lost profit on the exited foodservice businesses and foreign exchange also led to reduced segment profit. On top of it, the contributions of Enray and Cumberland were not significant to segment profit in the fourth quarter of 2014.

Fiscal 2014 Results

In fiscal 2014, Smucker reported adjusted earnings of $5.64 per share, exceeding management's guidance range of $5.55-$5.60 per share and the Zacks Consensus Estimate of $5.58 per share. Earnings also increased 5% from the year-ago results owing to lower share count driven by share buybacks.

Sales declined 5% to $5.610 billion in fiscal 2014 and also lagged the Zacks Consensus Estimate by 0.3%. The decline was in-line with the company's guidance. The decline in sales was mainly due to lower net price realization.

Recent Update on Coffee Prices

Most recently, the company increased its packaged coffee prices of Folgers and Dunkin' Donuts branded coffee products by an average 9% in response to the continuous hike in green coffee costs. The rise in green coffee costs is largely due to increasing prices of Arabica coffee since January this year as a result of an ongoing drought in Brazil. However, the price increase does not affect K-cup packs sold at restaurants.

Guidance for Fiscal 2015

The company provided an improved guidance for fiscal 2015 in order to reflect the rise in coffee prices. The company now expects net sales to increase year-over-year by approximately 5% in compared to 5% sales decline in fiscal 2014. Adjusted earnings are expected in the range of $5.95 to $6.05 per share, higher than $5.64 per share reported in fiscal 2014.

Smucker currently holds a Zacks Rank #4 (Sell).

Other better ranked food companies include B&G Foods Inc. ( BGS ), BRF S.A. ( BRFS ) and Hain Celestial Group Inc ( HAIN ). While B&G Foods and BRF S.A. sport a Zacks Rank #1 (Strong Buy), Hain Celestial carries a Zacks Rank #2 (Buy).

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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 Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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