J.M. Smucker reported FQ1 EPS of $1.90, down 20% YOY, but a penny above consensus expectations. Sales decreased 6%, but in constant currencies excluding divestitures, sales increased 1%. Sales were 3% above consensus, led by the Consumer Foods and Coffee segments. By segment:
- Retail Pet Foods increased 2% with volume/mix up 2%. However, dog Food sales decreased 4%. Profit margins contracted 580bps due to higher commodity and transportation costs.
- Retail Coffee sales decreased 5% as it lapped the retail inventory restocking. Management said at-home coffee currently represents around 75% of all coffee drinking occasions compared to two-thirds pre-pandemic. The Dunkin’ brand grew 9%. The company’s K-cup portfolio grew 10%. Profit margins contracted 410bps due to higher commodity costs and lower pricing.
- Retail Consumer Foods sales decreased 11%. Growth was led by Uncrustables, which grew 28%. Profit margins expanded 30bps.
- International & Away From Home increased 6%. Profit margins expanded 10bps.
Total gross margins contracted 370bps due to higher commodity and transportation costs, mostly in Pet Foods. Price increases took effect in July. Total operating margins contracted 310bps with marketing spend. The CEO said, “Our industry continues to navigate a period of significant supply chain volatility, disruption, and cost inflation. In the near term, we expect to experience higher raw material and logistics cost increases.”
Management lowered EPS guidance for the year by about 5%, from $8.70-9.10 to $8.25-8.65. Pricing actions are expected to lag cost inflation, so management expects FQ2 to decline 15% and FQ3 EPS to be down YOY. Management attributed the weaker outlook to lower sales and gross margin. COGS inflation is expected to be HSD%. Comparable sales are expected to grow 2.5% at the mid-point, reflecting a deceleration in at-home consumption trends. Gross margins are expected to be ~36%, 100bps lower than previously expected and 300bps lower YOY.
The F22 outlook disappointed investors with a higher inflationary outlook than the previous quarter when management indicated inflation could be handled and guided above consensus expectations. Now management guided below where consensus was a quarter ago. J.M. Smucker is on our shortlist as we are lower than management’s expectations for the ability to pass on price increases with so much of the portfolio in weaker/promotional brands. The company disproportionately benefited from the shift to at-home meal consumption will is reversing while competition in CPG is accelerating with inflationary driven price increases.
