Despite several bouts of market turbulence in the last year, J.M. Smucker Company's (NYSE:SJM) stock has bucked the trend and continued higher. The company has been bolstered by steadily rising sales and profit, and the stock has outperformed the broader stock market as measured by the S&P 500.
What has been the key to the company's success, what is happening now that could keep the trend going, and what should investors expect from their holdings of its stock?
Caffeine and companionship = growth
Smucker's breaks its business down into four segments: coffee, consumer foods, pet foods, and international. In the latest quarter, consumer foods and international were down 5% and 4% from last year, respectively. This was offset by a 1% increase in coffee as well as the purchase of Big Heart Pet Brands last March.
Consumer foods were impacted by the sale of the Smucker's milk business and declines in Jif peanut butter and Pillsbury baking products, but it saw gains with the launch of Smucker's Uncrustables frozen sandwiches. Even though the foods division has seen stagnating sales as of late, profit increased by 6% last quarter, mostly from proceeds from the milk business sale.
The international segment, the company's smallest, saw declines in sales because of unfavorable foreign currency exchange rates. Despite that, profits increased 4% because of lower expenses.
Coffee was the shining star, with Dunkin' Donuts K-Cup's, Folgers, and other coffee brand sales increasing offsetting declines in Folgers K-Cup sales. Smucker's licensing agreement with Dunkin' Brands Group to sell consumer coffee is a standout for the business and has been a growth leader, helping increase profit for the segment by 17% from last year. Coffee is now Smucker's largest contributor to total sales and profits.
Last spring, Smucker decided to make a foray into pet food, purchasing Big Heart Pet Brands last March for $5.8 billion in stock and cash. The deal has contributed to both sales and profit. During the last report, the pet food division just trailed coffee as the second biggest contributor to Smucker's top line, although profit margins were only at 17% compared with over 30% for the coffee segment.
While coffee and pet food may not be the first things to come to mind at the mention of Smucker (I think of peanut butter and jelly), it has been a testament to the company's ability to adapt and grow while its core food segment has been stagnant.
A push from Dunkin' and premium pet treats
Throughout the year, company management has asserted that coffee and pet food would provide the means to grow its business. The last quarter showed that total sales guidance needed to be reduced by $100 million to $7.8 billion, but full-year profit guidance was increased a little over 2%.
The trend has been continued weakness in foods like Jif peanut butter and Pillsbury baking products, and the company expects continued near-term struggles. This is expected to be offset by the higher profit margin in coffee and the new sales and income from the Big Heart purchase. The company has also been cutting manufacturing costs and has benefited from lower commodity prices, both of which have helped the bottom line.
Some cracks in the foundation have started to show in the coffee segment, though, and Smucker has encountered some early problems with the new pet food business. While Dunkin' K-Cup sales continue to be strong, the Dunkin' bagged coffee and Folgers K-Cups and bagged coffee have been struggling. Management has admitted those areas need some work, and that the Folgers business, the largest constituent of the coffee segment, needs to be "repaired."
The Big Heart business, while adding new sales and profit for Smucker, has been in decline since the purchase last spring. Sales of premium food like Natural Balance and dog snacks like Milk Bone have increased by high single-digits, but that was more than offset by declines in Kibbles n' Bits and other dry foods. Smucker has been funneling an increased advertising budget toward these areas to turn the declines around.
Last year, Smucker reduced its total advertising budget to help offset the costs to buy Big Heart, but management said a return to historical advertising spending is under way to help support the suffering food segment and the struggling areas of the coffee segment.
Outside of those measures and the overhead cost cutting, the only other noteworthy item was the plan to pay down debt taken on from Big Heart. Paired with the 5% increase in cash flow up to $975 million expected at the end of last quarter and its history of bringing outside brands into its fold, it looks like JM Smucker could be in the market for another acquisition of some sort next year. Management briefly alluded to this on its earnings call in February.
What investors should consider
When JM Smucker reports its full fiscal year results on June 9, investors will want to listen for updates on the key growth areas of coffee and pet food. Also important will be the struggling brand areas, especially in the consumer food division.
Ultimately, though, Smucker's is a stable business with a large arsenal of brands. Even the "struggling" areas of the company are only coping with single-digit declines. Management's method of purchasing developed food companies that fit with its existing portfolio has a proven record of turning out predictable returns for shareholders.
With recent volatility in the stock market, that slow but steady type of stock growth is especially appealing. I don't expect any explosive expansion, but those looking for a company to smooth out gut-wrenching swings in their stock portfolio could look no further than the diversified staples business of JM Smucker Company.