Towards the end of November food giant J.M. Smucker (NYSE:SJM) held its earnings conference call. Sales and free cash flow declined 4% and 70% respectively . Lower prices and a lower level of accounts receivable collection help explain these figures. However, this company may still represent a good long-term investment. Four takeaways from J.M. Smucker's earnings call will shed light on why.
Finding the fair price
J.M. Smucker's revenue fell for three reasons. First, commodity prices have declined recently and J.M. Smucker wants to pass the savings to consumers in the form of lower prices. This represents an attempt on the company's part to build positive rapport with the customer and the public at large. Second, J.M. Smucker wants to see a reasonable increase in volume in an effort to maintain or increase profits with the sacrifice of short-term growth in revenue. Finally, J.M. Smucker exited some businesses such as the USDA commodity peanut butter program for schools .
One of J.M. Smucker's rivals, Kraft Foods Group (UNKNOWN:KRFT.DL) also experienced a sales decline of 4.2% due to a pass thru of price declines and a more stable commodity pricing environment. Kraft also experienced difficult comparisons due to extraordinary shipping of "safety stock" this time last year in relation to its spin-off from parent company Mondelez International (NASDAQ:MDLZ). However, large companies such as Kraft Foods and J.M. Smucker also face a much deeper problem: market saturation in developed markets and changing customer tastes. Consumers want ready-to-eat food on the go. In the most recent quarter, Mondelez's revenue grew 1.8% driven mainly by emerging markets growth of 10.7% and growth in Mondelez's power brands comprised of ready-to-eat snacks such as Tuc and Club Social crackers, Barni biscuits, and Lacta chocolate. J.M. Smucker and Kraft Foods Group both sell a large number of grocery items such as peanut butter and cheese that don't necessarily fall into the ready-to-eat category. These two companies probably need to focus on more convenience oriented products and overseas expansion. Kraft derives all of its sales from North America. J.M. Smucker derived 77% of its sales from the U.S. in the most recent quarter.
K-Cups sales below expectations
J.M. Smucker's sales of Green Mountain Coffee Roasters' (UNKNOWN:GMCR.DL) K-Cups "fell below expectations". K-Cup volume increased 4% with sales flat versus the same time last year according to the earnings call. Millstone K-Cups declined in sales serving as a drag on J.M. Smucker's K-Cup category. However, company executives believe that "repositioning" the brand to a more premium status may turn this product category around. While J.M. Smucker lowered its 2014 expectation of K-Cup sales , it believes in maintaining a positive long-term relationship with Green Mountain Coffee Roasters .
You may think that J.M. Smucker's grape jelly represents its best seller when in fact it's just an afterthought for the company. J.M. Smucker grew its strawberry and some of its other flavors. It also grew its squeezed fruit spread business. However, J.M. Smucker actually does not focus on its grape jelly in the most recent quarter, calling it a "no profit business" or a "low-margin" business. J.M. Smucker also struggles with "better for you categories" such as no to low sugar and its Simply Fruit business.
Observing the success of new product lines such as Jif Whips , J.M. Smucker plans to launch over 100 new products this fiscal year along with major marketing initiatives over the next year. Leverage its sponsorship of the 2014 Winter Olympics will provide marketing exposure of new products such as Smucker's Natural. Moreover, it hopes to shed some new marketing light on old products. Also, J.M. Smucker plans to distribute K-Cups through new channels such as e-commerce and it plans to introduce "three new varieties" next year. J.M. Smucker believes K-Cups will perform well over the long-term. J.M. Smucker's recent acquisition strategy centers on shoring up its supply chain. One of its acquired companies, Enray, is a distributor of organic seeds and beans which could help J.M. Smucker in future products geared toward the more health conscious consumer. Its other acquisition of the automated silo company, Silocaf, will help ensure its procurement of green coffee .
J.M. Smucker's management seems positive about its future initiatives. However, you should keep an eye on its declining cash flow. If the company spends too much money on its endeavors, the company and its shareholders may find itself in quite a jam. That being said, the facts highlighted in this article definitely makes J.M Smucker worth a closer look by Foolish investors.
William Bias owns shares of Mondelez International and Kraft Foods. The Motley Fool recommends Green Mountain Coffee Roasters. 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.