J.M. Smucker (NYSE:SJM), the marketer of branded food products, reported second-quarter results that were below expectations, which led to a drop in the stock price.
J.M. Smucker transferred lower commodity prices to its customers by decreasing coffee prices. This led to revenue dropping 4% over last year to $1.56 billion. The top line missed estimates despite the acquisition of Enray in August 2013 and a new Cumberland distribution agreement it entered in July of this year.
Also, J.M. Smucker's international, foodservice, and natural foods segment was a laggard, witnessing 10% lower volumes during the quarter. This was mainly due to the elimination of certain parts of the business in this segment. However, the addition of Enray and the distribution agreement should benefit this segment going forward.
Nonetheless, the retail coffee segment performed well as great demand resulted in higher volumes. Moreover, lower costs for green coffee helped expand the company's gross margin and led to higher earnings of $1.52 per share.
J.M. Smucker faces stiff competition in the K-cups segment. Sales of K-cups are declining since the segment is overpopulated with a large number of players. However, Smucker was the first company to start selling K-cups that were licensed by the coffee maker Green Mountain Coffee Roasters (UNKNOWN:GMCR.DL).
Although J.M. Smucker was the first one to get the license and this greatly benefited the food retailer, Green Mountain's licenses to other players has made the competition stiff. Starbucks and other companies started making their own single-serve pods, which have hampered Green Mountain's sales. Nonetheless, Green Mountain plans a new Keurig 2.0 platform, which will add to its product portfolio.
Despite difficulties and challenges, J.M. Smucker is taking a number of measures to boost its top line and stir demand. For instance, it plans to introduce 100 new products this year, which should bring in more revenue.
In order to strengthen its K-cups business and bring back consumer interest in the product, the food and beverage retailer plans to experiment with new flavors. It will add three new flavors by the year 2015, which should lure more customers. Also, J.M. Smucker will make these products available through its e-commerce channel, adding convenience for its customers. Additionally, the retailer will strengthen its marketing strategies in general and, for the 2014 Winter Olympics 2014 in particular.
The future looks bright
J.M. Smucker lowered its revenue outlook for the year due to declining K-cup sales and a weak international business. However, the efforts the company has undertaken can change things for the better. New flavors for K-cups and marketing initiatives should add to its revenue.
Also, the acquisition of Enray, a manufacturer of premium organic products, will add to the strength of Smucker's natural foods business. This will expand the international and natural food segment in the months to come.
TreeHouse Foods (NYSE:THS) has also resorted to an acquisition strategy to grow its business. The food manufacturer acquired Associated Brands in October this year, expanding its presence in the powdered drink and specialty tea category. TreeHouse Foods' single-serve business will benefit from the sale of specialty tea which offers many nutritional benefits, adding to its growing coffee segment.
Associated Brands is not the only acquisition TreeHouse made this year--TreeHouse acquired Cains Foods, a manufacturer of shelf-stable dressings and sauces, in July. This acquisition has already started yielding benefits which are reflected in TreeHouse's recently reported quarter. Its revenue grew 5.4% to $567.2 million over last year, driven by the benefits of Cains Foods. Therefore, J.M. Smucker's acquisition looks attractive enough for a brighter future.
Overall, J.M. Smucker looks decently placed for the forthcoming holiday season. New products, new flavors for K-cups, and an acquisition which expands its natural foods segment should help the food retailer register higher sales in the months to come. Moreover, improved marketing efforts and the Winter Olympics are additional tailwinds. Therefore, this company could prove to be a good bet going forward.
Pratik Thacker has no position in any stocks mentioned. The Motley Fool recommends Green Mountain Coffee Roasters and Starbucks. The Motley Fool owns shares of Starbucks. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.