Smucker (SJM) Down 2.5% Since Last Earnings Report: Can It Rebound?

A month has gone by since the last earnings report for Smucker (SJM). Shares have lost about 2.5% in that time frame, outperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Smucker due for a breakout? Before we dive into how investors and analysts have reacted as of late, let’s take a quick look at its most recent earnings report in order to get a better handle on the important drivers.

Smucker Q3 Earnings Surpass Estimates, Sales Miss

The J. M. Smucker Company posted third-quarter fiscal 2020 results, wherein the bottom line grew year over year and beat the Zacks Consensus Estimate. However, sales were soft during the quarter. The results were hurt by softness in premium dog food offerings and decreased volume/mix in the U.S. Retail Pet Foods segment, among other factors. Management reaffirmed its sales, earnings and free cash flow guidance for fiscal 2020.

Quarter in Detail

Adjusted earnings of $2.35 per share rose 4% year over year and comfortably beat the Zacks Consensus Estimate of $2.22. The year-over-year increase can be attributable to lower SG&A costs, reduced interest expenses and a decline in tax rate.

Company Quote

Net sales amounted to $1,972.3 million, which marginally missed the consensus mark of $1,973 million. Moreover, the top line dropped 2% year over year, mainly due to decreased volume/mix in the U.S. Retail Pet Foods segment. However, improved net price realization offered some respite.

Although Smucker’s sales were affected by softness in premium dog food offerings, management is pleased with the performance of the rest of the offerings in the portfolio. Notably, its top-line performance reflected solid growth for the Smucker’s and Uncrustables brand. Also, the company saw improved volume fundamentals for coffee and peanut butter brands.

Adjusted gross profit fell 3% year over year to $752.3 million and adjusted gross margin contracted 50 basis points to 38.1%. Adjusted operating income decreased 2.6% year over year to $395.8 million and adjusted operating margin contracted 10 basis points to 20.1%.

Segment Performance

U.S. Retail Pet Foods: Segment sales came in at $721.9 million, which dropped 5% from the prior-year figure owing to lower Natural Balance brand and private-label sales, and reduced volume/mix. Net price realization was neutral in the quarter.

U.S. Retail Consumer Foods: Net sales rose $0.2 million from a year ago to $422.9 million, driven by increase in volume/mix on account of growth in Smucker’s Uncrustables and Jif brands. However, lower net pricing — mostly due to the Jif brand — impacted sales.

U.S. Retail Coffee Market: Sales in the segment decreased $2.8 million from the prior-year quarter to $558.8 million due to lower net price realization, partially offset by favorable volume/mix.

International and Away From Home: Net sales improved $0.1 million from the prior-year quarter to $268.7 million, thanks to favorable foreign currency exchange, offset by decline in net price realization and volume/mix.

Financials

Smucker exited the quarter with cash and cash equivalents of $74.4 million, long-term debt (less current portion) of $4,583.3 million and total shareholders’ equity of $8,170.4 million. Cash flow from operations amounted to $521.6 million in the fiscal third quarter and free cash flow totaled $465.1 million.

Fiscal 2020 Outlook

Smucker reiterated its net sales, adjusted earnings per share and free cash flow guidance for fiscal 2020. The company still expects net sales to be down 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. On a comparable basis, the company continues to expect sales decline of 2% from a year ago.

Adjusted earnings per share for 2020 are still anticipated within $8.10-$8.30. Smucker’s adjusted earnings came in at $8.29 per share in fiscal 2019. The bottom line is likely to be affected by reduced contributions from sales. Gross margin is now anticipated to be 38.2% in fiscal 2020 compared with 38.5% projected earlier. SD&A costs are now projected to decline 2.5% compared with the previous expectation of 2% fall.

Free cash flow is still projected to be $850 million.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in fresh estimates.

VGM Scores

Currently, Smucker has an average Growth Score of C, however its Momentum Score is doing a lot better with an A. Charting a somewhat similar path, the stock was allocated a grade of B on the value side, putting it in the top 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of A. If you aren’t focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Smucker has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.

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