J.M. Smucker (NYSE: SJM) closed out the fourth quarter of fiscal year 2018 in rather flat fashion, as a bird’s-eye view of revenue, pulled from the company’s earnings report issued Thursday morning, suggests:
J.M. Smucker: The raw numbers
|Metric||Q4 2018||Q4 2017||Year-Over-Year Growth|
|Revenue||$1.781 billion||$1.784 billion||(0.02%)|
|Net income||$185.9 million||$110.4 million||68.3%|
|Diluted earnings per share||$1.64||$0.96||70.1%|
What happened this quarter?
Net sales declined by $2.5 million. Management cited volume and mix weakness in oils, peanut butter, and baking products, which was partially offset by stronger volume in the company’s coffee segment.
Notably, higher price realization in peanut butter and oils also helped to minimize the volume/mix deterioration. Smucker is one of the few large consumer packaged goods (CPG) companies to report any success in raising prices this reporting cycle. As I recently discussed, most multinational CPGs, including category giant Unilever, have faced downward pricing pressure thus far in 2018.
Nonetheless, a bit of pricing power only went so far for Smucker. After removing a positive currency effect of $4.6 million during the quarter, the company experienced an organic sales drop of roughly $7.0 million over the last three months.
In Smucker’s coffee segment, revenue increased by $2.3 million to $508.2 million. Favorable volume and mix in the Folgers brand and licensed Dunkin’ Donuts coffee brand was offset by pricing softness due to promotional trade spending. Segment operating income improved 4% to $156.0 million.
The U.S. retail consumer foods business reported a revenue decrease of $8.5 million, to $465.3 million. The organization reported that volume and mix declined in the Jif, Crisco, and Pillsbury brands, accounting for about 8 percentage points of drag on the segment’s sales, though this was again offset by 6 percentage points of positive pricing in the Jif, Smucker’s, and Crisco labels. Higher pricing helped push operating income up by $5.4 million, to $114.1 million.
In the U.S. retail pet foods segment, revenue of $533.6 million was virtually unchanged, but higher input costs and a voluntary recall of certain Gravy Train products caused a 13% decline in segment profit margin, to $102.1 million.
In Smucker’s smallest revenue stream, the “International and Away from Home” business, both revenue and segment profit booked 2% increases, to $274.2 million and $49.6 million, respectively.
While Smucker is facing industry pressures similar to its peers, including challenges from young, upstart brands, difficulty in gaining new grocery shelf space, and a gradual shift to online purchasing by consumers, the company still managed to increase gross profit by roughly 7% during the final quarter of the year, to $43.7 million. The margin advance was assisted by certain derivatives gains, as well as the pricing realization discussed above.
The organization’s significantly higher quarterly net income resulted from a few one-time factors, including a curtailment in special project costs equal to $7.1 million, and a comparative benefit due to a prior-year impairment charge of $57.5 million.
What management had to say
In J.M. Smucker’s earnings press release, CEO Mark Smucker described the company’s current challenges, as well as the concrete steps management is taking to attempt to push revenue expansion in the coming years. His quote is a bit lengthy, but worth reading in full:
“While fourth quarter adjusted earnings per share was below our projections due to industrywide headwinds and certain discrete items, the actions we are taking to align our portfolio for growth set up our business to win…In the past few months, we brought 1850 premium coffee and Jif PowerUps snacks to market, innovations created in response to changing consumer preferences. We acquired Ainsworth, thereby strengthening our pet food portfolio with the addition of the high-growth, on-trend Rachel Ray Nutrish premium pet food brand. We also announced plans to explore a potential divestiture of our U.S. baking business, underscoring our commitment to regularly evaluate our portfolio and emphasizing our focus toward growing the coffee, snacking, and pet food categories. Further, we have executed on our cost reduction programs, which have fueled investments for key growth brands such as Dunkin’ Donuts, Smucker’s, Uncrustables, and Nature’s Recipe. As we continue to transform our Company, we are confident in our ability to deliver against our strategic objectives and enhance long-term shareholder value.”
While the tone above is quite positive, at least in the near term, management is striking a more cautious note regarding forward guidance. Net sales are expected to increase 13% in fiscal 2019 to $8.3 billion, but this is almost entirely composed of an acquisition benefit from the Ainsworth Pet Nutrition acquisition, which Mark Smucker mentions above (the $1.7 billion transaction closed on May 18, 2018).
Adjusted earnings per share are projected to rise modestly from $7.96 in 2018, to a range of $8.40-$8.65 next year, primarily reflecting the impact of the Ainsworth deal and lower income tax expense from recently enacted U.S. tax reform. At least at the outset of fiscal 2019, Smucker’s prospects remain, well, rather flat.
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