The J.M. Smucker Company (SJM), a leading manufacturer of food products, posted lower-than-expected first-quarter fiscal 2015 results wherein both earnings and revenues missed the Zacks Consensus Estimate. The company also lowered its sales guidance for the fiscal year but maintained its earnings outlook.
First quarter fiscal 2015 adjusted earnings (excluding certain restructuring, merger and integration costs and unallocated derivative gains and losses) of $1.34 per share lagged the Zacks Consensus Estimate of $1.37 by 2.2% due to lower-than-expected sales. However, lower share count owing to share buybacks led to a year-over-year increase of 11% from the prior-year adjusted earnings of $1.29 per share.
Revenue and Margin Details
Net sales in the first quarter declined 2% year over year to $1.32 billion, despite favorable sales mix. The results also lagged the Zacks Consensus Estimate of $1.36 billion. The decline was due to a 3% decrease in net price realization in response to lower commodity costs realized during the year 2014, mainly in coffee and the continued impact of the company's exit of its private label hot beverage business in its International, Foodservice, and Natural Foods segment during 2014.
The acquisition of Enray Inc. (Aug 2013) and the impact of the company's licensing and distribution agreement with Cumberland Packing Corp., which commenced on Jul 1, 2013 also added a combined $23.6 million to first quarter sales, while foreign exchange reduced net sales by $4.5 million in the quarter. However, these positives could not offset the price declines in retail and foodservice coffee. Excluding acquisition, distribution agreement and currency impact, sales declined 3% to $1.30 billion in the quarter.
In addition, volume gains realized in Crisco oils, Jif peanut butter and Folgers coffee were offset by declines in Pillsbury baking mixes, Santa Cruz Organic beverages, flour and frosting and the negative impact of the previously announced exit of portions in International, Foodservice and Natural Foods segments.
Adjusted gross profit grew 2% to $500.5 million. Adjusted gross margin also expanded 150 basis points (bps) to 37.8% as lower input costs primarily that of coffee, peanuts and oils more than offset lower net price realization. Also, favorable sales mix and the addition of Enray and Cumberland contributed to gross profit in the quarter.
Adjusted operating profit climbed 3% to $222 million, whereas adjusted operating margin increased 80 bps to 16.8% owing to higher gross profits, which offset the increases 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 2% decline in sales to $502.7 million mainly due to the impact of a price decline (due to lower coffee costs in 2013 and initial months of 2014) and unfavorable sales mix. Net sales of K-cups also declined 1%. However, the segment’s volumes increased 2% led by volume gains of Folgers, Cafe Bustelo and Dunkin' Donuts brands. K-cup volumes also improved 8% in the quarter.
In Jun 2014, the company had 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. (Read: Smuckers Raises Coffee Price).The company also increased promotional spending to maintain competitive pricing. Though the company recognized lower green coffee costs in the first quarter of fiscal 2015, lower net price realization offset the benefit. The price increase is expected to be fully realized in the second quarter of fiscal 2015.
Segment operating margin contracted 30 bps to 27.4% in the quarter as a decline in K-cup sales, unfavorable mix, and higher selling expenses offset higher volume gains in the quarter.
U.S. Retail Consumer Foods: U.S. Retail Consumer Foods segment sales declined 3% to $522.8 million due to lower net price realization primarily in the Crisco brand and flat volumes. Higher volumes of Smucker's Uncrustables frozen sandwiches, Jif and Crisco brands and fruit spreads were offset by volume decline of Smucker’s Pillsbury brand.
Segment profit margin expanded 380 bps to 21.6% in the quarter, primarily due to lower commodity costs, which offset lower net price realization.
International, Foodservice and Natural Foods: Net sales in the International, Foodservice and Natural Foods segment declined 1% from the previous-year quarter to $298.3 million. Excluding the impact of the acquired Enray business, the Cumberland distribution agreement and foreign exchange, segment net sales decreased 7% from the prior-year period due to lower price realization mainly in foodservice coffee.
Segment volume declined 7%, excluding the acquisition impact, as volume gain in R.W. Knudsen Family brand was more than offset by the impact of the exited foodservice businesses, decreases in Santa Cruz Organic beverages and volume declines in the Robin Hood and Five Roses brands in Canada.
The segment's profit margin contracted 250 bps to 11.9% in the reported quarter due to higher costs realized for products sold in Canada and unfavorable foreign exchange. Also, the lost profit on the exited foodservice business and contributions of Enray and Cumberland were not significant to segment profit in the first quarter of fiscal 2015.
Lowered Sales Guidance for Fiscal 2015
The company has lowered its sales guidance for fiscal 2015, possibly due to soft first quarter fiscal 2015 results. The company now expects net sales to increase slightly less than 5% year-over-year (against earlier expectation of 5% increase). The new guidance (which includes approximately $25.0 million of expected net sales contribution from its pending acquisition of Sahale Snacks, Inc.) is however still better in comparison to 5% sales decline in fiscal 2014.
The company has re-affirmed its earnings guidance for fiscal 2015. 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 #3 (Hold).
Some better-ranked food companies include Aramark (ARMK), Treehouse Foods, Inc. (THS) and Pinnacle Foods Inc. (PF). While Aramark and Treehouse sport a Zacks Rank #1 (Strong Buy), Pinnacle carries a Zacks Rank #2 (Buy).
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