Shareholders of J.M. Smucker (NYSE:SJM) weren't expecting dazzling earnings growth as they awaited the company's fiscal first-quarter 2020 report, as management had already warned that full-year revenue expansion would fall in a middling range of 1%-2%. However, the last three months have drifted well off this projected pace, as results released on Tuesday revealed.
Let's walk through the headline numbers below and then ascertain what's compressed the packaged-food conglomerate's potential so early in its fiscal year. (Note that all comparison numbers in the discussion that follows refer to those of the prior-year comparable quarter.)
J.M. Smucker: The raw numbers
|Metric||Q1 2020||Q1 2019||Change|
|Revenue||$1.78 billion||$1.90 billion||(6.3%)|
|Net income||$154.6 million||$133.0 million||16.2%|
|Diluted earnings per share||$1.36||$1.17||16.2%|
What happened this quarter?
- After accounting for $73.1 million in lost sales following the divestment of the U.S. baking business in August of 2018 and a $25.4 million contribution from the company's May 2018 acquisition of Ainsworth Pet Nutrition, Smucker's sales still decreased by 4%. The company attributed the decline to 3 percentage points of unfavorable volume and mix concentrated in the coffee and pets businesses, as well as 1 percentage point of negative price realization.
- In the coffee segment, net sales fell by 5%, to $466 million. Management cited cost deflation in green coffee, which was passed on to customers in the form of promotions, as a key factor. Volume and mix also pressured the top line, due to weakness in the Folgers brand and retailer inventory adjustments.
- U.S. retail pet foods, which is now Smucker's largest segment following the Ainsworth acquisition, saw its top line dip by nearly 4%, to $670 million, after adjusting for the $25.4 million in incremental Ainsworth sales mentioned above. The company attributed nearly all of the decline to its private-label brands, specifically, its exit from certain low-margin private-label product lines. Management also pointed to heightened competition and soft trends at retailers. These various factors led to a 6% drop in volume and mix, but on a positive note, the pet business was able to realize 2 percentage points of pricing power during the quarter.
- Net sales in the U.S. retail consumer food segment dropped 17%, to $402 million, due to the divestment of the U.S. baking business. Normalizing for this lost revenue, core sales dipped by 3%. Favorable volume and mix of 1 percentage point was offset by 4 percentage points of lower net pricing, mostly from a list-price adjustment to the Jif brand, initiated in the prior sequential quarter.
- In the company's smallest segment, its international and away-from-home business, sales slipped by 6.7%, to $241 million. The sale of the U.S. baking business and foreign-currency effects together shaved 2 percentage points off the top line. Lower volume and mix reduced sales by 3 percentage points, while weaker Folgers pricing produced a drag of 2 percentage points.
- The company did make progress in profitability, as gross margin improved by 370 basis points, to 39.3%. Most of this advance was due to lower recorded costs resulting from a favorable change in derivative gains and losses versus the prior-year period.
What management had to say
CEO Mark Smucker directly addressed the company's slim results in comments included in Tuesday's earnings release:
Our first-quarter performance fell short of our expectations primarily due to the timing of shipments and deflationary pricing in the coffee and peanut butter categories, as well as competitive activity in the premium dog food category. We have continued momentum in many key product categories, and we are already taking decisive actions and prioritizing initiatives that strengthen our business. We remain confident in our strategy, which includes a continued focus on our growth imperatives to lead in the best categories, build brands consumers love, and be everywhere, combined with a relentless focus on operating with financial discipline, all of which will enhance shareholder value for the long term.
For those interested in finding relative safety through investment in consumer goods stocks, Smucker's comments illustrate the reality of present challenges in this industry. J.M. Smucker branched out into the premium pet foods business in an effort to open up faster-growing revenue streams relative to its packaged-foods segments. Yet capable competitors have also redirected resources to new adjacencies.
For example, General Mills acquired the premium pet food brand Blue Buffalo in April 2018, weeks before Smucker closed its Ainsworth transaction, and it's similarly attempting to scale its newly purchased brand. Thus, Smucker finds itself in a near-term jam as its premium pet business, acquired to spur growth, is already fighting for market share in an increasingly crowded field.
J.M. Smucker pulled back on its previous financial guidance for fiscal 2020. The company now expects revenue to fall in a range of negative 1 percent growth to flat against the prior year, versus the previous forecast of 0%-1% year-over-year expansion. Adjusted earnings-per-share projections have been reduced slightly to a band of $8.35-$8.55, versus the prior expectation of $8.45-$8.65.
These revisions, coupled with the quarter's revenue retracement, soured investors' moods -- shares lost 8% on Tuesday. But on the bright side, the share-price drop helped push Smucker's already generous dividend yield even higher: The stock now yields 3.3% on an annualized basis.