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J.M. Smucker Is Getting Strangled By Lower Prices

By David Butler – Updated Aug 28, 2019 at 6:42AM

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Pricing pressures kept J.M Smucker shares depressed.

The stagnation at J.M. Smucker (SJM -0.90%) has an eerie resemblance to that of Kraft Heinz (KHC 0.45%). The old school maker of various jams, Jif peanut butter, and Folger's coffee reported a lackluster fiscal first quarter with earnings coming in well below expectations.

Adjusted financials were not promising

Revenues declined 6% year over year to $1.78 billion. It's worth noting that J.M. Smucker had some line items including both acquisitions and divestitures that affected these sales. Excluding those items, J.M. Smucker reported a 4% decline on an adjusted basis. One of the key areas that was credited in the shift in net sales were prices. Net prices decreased for key items like coffee and peanut butter, while only being partially offset by increases in pricing for snacks and pet food. Ironically, one of the primary areas held accountable for reduced net sales was pet food.

On an adjusted basis, operating income showed a strong 14% increase. This increase included unallocated derivative gains/losses. Without these, the company had an adjusted decrease in operating income of $26.4 million, or 8%. Net earnings were $1.36 on a GAAP basis, and $1.56 on an adjusted basis. The GAAP earnings actually mark a 16% increase. On an adjusted basis, there was an 11% decline. Many analysts had expected adjusted earnings to be in the $1.70 range, and the stock is down nearly 10% as a result of the news.

J.M. Smucker's store front

Image source: J.M. Smucker

Hyper-competitive pricing paints a tough road

Can J.M. Smucker get out of this rut? It's kind of hard to see at present. The company has a product lineup that should garner demand across multiple groups of consumers, but weak pricing is wreaking havoc on their ability to derive higher revenues. There's a bit of irony here when you consider how much economic focus has been on the fear that the trade war with China would drive up prices on many products for consumers. For J.M. Smucker, it is the exact opposite. Highly competitive retail is damping its ability to control pricing. As big names like Amazon (AMZN 1.92%), Walmart (WMT 0.82%), or any other big entity pressing for market control put pressure on prices. Creating a tough situation for the actual manufacturers of those goods.

There's also the rising interest in "all natural" to consider. We've seen many new names pop up in the food game. We've also seen the rise of generic brands like Walmart's "Great Value", and Amazon's foray into Whole Foods. The competition here is much stronger than it used to be. It explains why names like Kraft Heinz, J.M. Smucker, or Campbell Soup (CPB -0.46%) have struggled with earnings consistency as of late.

Flirting with three year lows, I'm not sure that I'd call this the time to try to play J.M. Smucker. The company provided updated full year guidance that did not go in the right direction. Net sales are expected to be flat at best, with the potential for a 1% decline. That's not an improvement from previous guidance of 1%-2% growth. Adjusted earnings expectations were also revised downward, to $8.35-$8.55 per share vs. a previous range of $8.45-$8.65. Looking at that new guidance conservatively, J.M Smucker's shares are trading at roughly 12.3x fiscal forward earnings. That's cheap, and the company offers a strong dividend of over 3%. While these attributes might be tempting, it seems to me that the current trends of pricing pressure from big time retailers is not something that's going to dissipate any time soon. To that end, I'm not sure what names like J.M. Smucker can do.

I'm getting worried that a few retailers have so much control over pricing and distribution that the road may be more and more difficult for J.M. Smucker. Based on the dividend and strength of it's balance sheet, I rate it a "hold" at this time. There are a lot of questions here, and we haven't really seen the answers yet.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. David Butler has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Amazon. The Motley Fool has a disclosure policy.

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