J.M. Smucker (NYSE:SJM) ended its fiscal 2019 year with flattish organic growth and lower profits due to a fourth-quarter goodwill impairment charge. In results released Thursday, the company also issued its fiscal 2020 outlook, which envisions fairly decent profitability following its acquisition of Ainsworth Pet Nutrition and the divestiture of its U.S. baking business in calendar 2018. Note that all comparison numbers in the discussion that follows refer to the prior-year comparable quarter.
J.M. Smucker: The raw numbers
|Metric||Q4 2019||Q4 2018||Growth (YOY)|
|Revenue||$1.90 billion||$1.78 billion||6.7%|
|Net income||$71.5 million||$185.9 million||(61.5%)|
|Diluted earnings per share||$0.63||$1.64||(61.2%)|
What happened this quarter?
- Revenue benefited by $201 million from the Ainsworth acquisition, and decreased $75 million from lost sales tied to the U.S. baking business divestment. Removing these effects and those of foreign currency translation, organic revenue decreased by $0.6 million, due primarily to lower net price realization.
- Coffee segment sales increased by 4% to $526 million, paced by double-digit sales growth in the Dunkin' Donuts and Cafe Bustelo packaged coffee brands.
- U.S. retail consumer foods revenue decreased by 15% to $394 million as a result of the sale of the U.S. baking business. Removing this effect, net sales rose 1% thanks to 10 percentage points of favorable volume and mix (primarily from Jif peanut butter, Crisco oils, and Smucker's fruit spread), which was offset by lower price realization.
- The top line of the U.S. retail pet foods segment jumped 35% to $721 million, boosted by the Ainsworth acquisition. Excluding the acquired revenue, sales dipped by $12 million following the segment's exit from certain private-label businesses and the discontinuation of wet dog food products under the Gravy Train label.
- In the company's smallest division, its international and away-from-home business, revenue dropped by 7% to $261 million. Management cited multiple factors behind the dip, including volume and mix, lower price realization, unfavorable foreign currency translation, and $2.5 million in noncomparable sales tied to the divested U.S. baking business.
- Operating margin dropped 950 basis points to 8.1%. This drastic difference was due to a noncash goodwill impairment charge of $97.9 million in the U.S. retail consumer foods segment, as well as an increase of nearly $46 million in selling, distribution, and administrative (SD&A) expenses related to the Ainsworth acquisition. The goodwill charge was taken to write down the value of the beverage and ancient grains businesses in the U.S. retail consumer foods segment.
What management had to say
In the organization's earnings press release, CEO Mark Smucker summarized an eventful fiscal year, and looked ahead to strategies for improving shareholder value -- and ultimately stock price -- over the next 12 months:
We are pleased with the progress that we made during the year toward executing against our strategic plan, which supported fourth quarter adjusted earnings growth of 8 percent and full-year adjusted earnings growth of 4 percent. We successfully integrated Ainsworth, extending our leadership in pet foods, while our key growth brands delivered double-digit sales growth, demonstrating the power of our brands when supported by ongoing product innovation, including 1850 [brand] coffee and Jif Power Ups. We continued to focus on productivity, allowing us to deliver on our cost reduction targets for the year, providing fuel for investment in future growth."
As we transition to fiscal year 2020, our organization is committed to delivering on its growth imperatives to lead in the best categories, build brands consumers love, and be everywhere our consumers want us to be. Disciplined investment in our brands across pet food, coffee, and snacking leaves us well-positioned to drive sustainable financial growth and enhance shareholder value for the long term.
J.M. Smucker's fiscal 2020 outlook appears a bit light on the revenue side. Full-year projections anticipate top-line growth of between 1% and 2%, a range that will essentially track expected consumer price inflation. According to the Bureau of Labor Statistics, the food component of the consumer price index rose 1.8% in the 12-month period ending in April 2019. Management's minimal expected growth range makes sense when you consider that Smucker struggled to achieve positive price realization in fiscal 2019; any top line growth will likely be generated by higher volume next year.
Looking to the bottom line, adjusted profits are expected to enjoy slightly greater expansion. Smucker expects adjusted earnings per share (EPS) of $8.45-$8.65, against adjusted EPS of $8.29 in fiscal 2019. At the midpoint of the expected range, Smucker will sweeten earnings by 3%, and if it hits the top of the range, earnings will increase by roughly 4.3%.