J.M. Smucker (SJM -0.03%) reported modest underlying growth in the fiscal third quarter of 2019 (the three months ended Jan. 31, 2019). In results released on Tuesday, the packaged foods conglomerate also notched adjusted earnings per share that landed slightly ahead of investor expectations, helping shares gain roughly 6.5% in the two trading sessions that followed the earnings release.
Below, let's review headline numbers from Tuesday's filing, as well as the salient details from the quarter and a look ahead at full-year guidance. Note that all comparison numbers in this article refer to the prior-year comparable quarter (the third quarter of fiscal 2018).
J.M. Smucker: The raw numbers
| Metric | Q3 2019 | Q3 2018 | Growth (YOY) |
|---|---|---|---|
| Revenue | $2.01 billion | $1.9 billion | 5.8% |
| Net income | $121.4 million | $831.3 million | (85.4%) |
| Diluted earnings per share | $1.07 | $7.32 | (85.4%) |
YOY = year over year. Data source: J.M. Smucker.
What happened this quarter?
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- As was the case in the fiscal second quarter, most of Smucker's revenue gain was attributable to the acquisition of Ainsworth Pet Nutrition in May 2018, an effect partially offset by the divestiture of J.M. Smucker's U.S. baking business in August 2018.
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Smucker reported underlying revenue growth (i.e., organic growth after removing the effects of the Ainsworth and baking business transactions) of 1%. This was due mostly to favorable volume and mix in the company's U.S. retail coffee and consumer foods businesses, which overcame declines in U.S. retail pet foods. The slight bit of growth provided a welcome change from the second quarter, in which a lack of pricing power pushed underlying revenue down by one percentage point.
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Net sales in the U.S. retail coffee business increased 2% to $561.6 million. Favorable volume and mix primarily in the Dunkin' and "1850" packaged coffee brands contributed 5 percentage points, which was reduced by lower net price realization.
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The U.S. retail consumer foods business' net sales dropped by 17%; after removing the effects of the U.S. baking assets divestment, net sales improved by 4%. The sales advance was supplied by favorable volume and mix in the segment's Smuckers, Uncrustables, and Jif "Power-Ups" products.
- The Ainsworth acquisition propelled the U.S. retail pet foods segment's top line higher by 35% to $759 million. Excluding this contribution, net sales decreased by just $1.2 million, which management attributed to the exit of certain private-label businesses and the discontinuation of the Gravy Train wet dog food line.
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In Smucker's smallest revenue stream, the international and away-from-home segment, net sales decreased by 12.5% to $268.6 million, after adjusting for the U.S. baking assets sale. Management attributed the drop primarily to unfavorable volume and mix, foreign currency translation, and lower net price realization.
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Gross margin crept up by 20 basis points to 38.5%. Removing acquisition and disposition effects, gross profit of $739.6 million represented an improvement of $11.1 million, or roughly 2%, against the comparable prior-year quarter.
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The wide disparity between current- and prior-year quarterly earnings seen in the table above is due to a one-time tax benefit of $715.3 million, which the company recorded in the third fiscal quarter of 2018, following changes in U.S. tax legislation.
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On an adjusted basis, J.M. Smucker booked earnings per share of $2.26, a healthy number that management attributed to favorable selling, distribution, and administrative expense discipline against the comparable quarter.
What management had to say
As Smucker continues to reshape its portfolio offerings via acquisitions and divestitures, investments in the market share of existing brands can often get obscured. During the company's earnings conference call, CEO Mark Smucker discussed the contribution of both acquired and existing brands to the quarter's organic revenue expansion:
We delivered strong sales performance for our growth brands, which increased 17% in the quarter. We also achieved strong growth for some of our leading brands, our core brands, demonstrating our ability to increase sales for both core and growth brands. Multiple brands in our pet business achieved double-digit sales growth, including Rachael Ray Nutrish, Meow Mix, Kibbles 'n Bits and Nature's Recipe.
Further Smucker's Uncrustables and Sahale Snacks also realized double-digit sales growth. While Dunkin' coffee achieved 9% sales growth, including strong performance across premium bag, and the recently launched canister offerings...With growth in a number of areas contributing to our third quarter results, we continue to make progress on our three consumer-centric growth imperatives of leading in the best category, building brands consumers love and being everywhere
Check out the latest earnings call transcripts for companies we cover.
Looking forward
Except for a slight tweaking of its expected effective tax rate, J.M. Smucker left its full-year 2019 earnings outlook, which it had previously trimmed by marginal amounts last quarter, unchanged.
The company still expects $7.9 billion in revenue for the current fiscal year and adjusted earnings per share of $8.00-$8.20. Following a credible quarter on both the revenue and earnings fronts, Smucker should be well positioned to meet its full-year targets with three months remaining in the fiscal 2019 year.
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