The 4Q FY15 SJM earnings raised a lot of questions about the direction of the company.
Although the company is not currently on our ideas list, we have some initial thoughts on the Q4 print and the FY16 outlook. After experiencing a challenging FY15, SJM management expects to recover in 2016, and years to follow. At the same time the company is digesting the largest acquisition in the company’s history. Given the flow of cost savings and commodity tailwinds, the recovery isn’t expected to occur until 2H16. They are projecting an aggressive assumption of 3% organic growth for FY16 and attributing it mainly to volume increases coming from new coffee products.
HEDGEYE THOUGHTS BY SEGMENT
COFFEE (Q4 Results: $468.6mm Net Sales, -1% growth, SOP Growth -19%)
Volume decreased 15% in Q4 and operating profits declined 19%, primarily driven by the Folger’s brand. Volume softness attributed to “customer response to higher promoted price points on shelf, competitive activity, and reduced promotional effectiveness,” said Smucker. A more compact-size line of Folger’s canisters, ability to merchandise the entire Dunkin’ Donuts line, and marketing budget increases are expected to yield overall growth. Overall, SJM’s volume of Keurig K-cups increased 2% and net sales up 20%, management is going to lean heavily on this growth to drive sales in the segment. Management anticipates that coffee will face challenges in the first quarter of FY16 as they will not benefit from lower commodity costs. Management has high expectation for the coffee segment in FY16:
- The company will see lower green coffee costs as FY16 progresses. Volume should benefit from lower promoted price points on the Folgers' mainstream offerings.
- This summer SJM will complete the conversion of the Folger’s large cans to a reduced canister size. The cost savings will be passed along to customers and the company will benefit from increased units sold.
- The Dunkin' Donuts K-Cup launch. Over time, management believes the offerings could double the current K-Cup business which is nearly $300 million in net sales in FY15.
HEDGEYE – The commodity tailwind is real but the Folger’s brand continues to struggle and K-Cups will likely disappoint on the top line. It will be a challenge for the company to hit the internal target s in FY16.
CONSUMER FOODS ($427.5mm, -8%, -5%)
Jif branded peanut butter volume decreased 6% and net sales decreased 18% due to a 7% price decrease in November 2014 and promotional spending recognized in the quarter. Volume for the Pillsbury brand decreased 8% and net sales decreased 18%. Per our previous research on GIS, we have determined the dry mix dessert business is not a good one to be in. We want to give them some credit here, Smucker’s Uncrustables volume increase 21% and net sales increased 14%. Although the U.S. packaged foods environment has been a tough one for a lot of companies, SJM is lagging behind the competition.
HEDGEYE – There is a reason why SJM bought Big Heart Pet Brands! SJM’s consumer food business is a collection of brands in unattractive segments of the industry. The business will continue to be challenged in FY16.
PET FOOD ($239.1mm, n/a, n/a)
SJM closed the acquisition of Big Heart Pet Brands on March 23, 2015, introducing them to an entirely new category. Management is targeting synergies for FY16 of $25 million, which is extremely low considering that their three year target is $200 million. Year one goals are said to be on the conservative side by counsel of the consultant they are working with on the integration.
HEDGEYE - Integrating the largest acquisition in the company’s history will take time. The company has not scaled back the synergy benefits, but the timing of the benefits have been delayed.
INTERNATIONAL, FOODSERVICE, & NATURAL FOODS ($311.9mm, 6%, 10%)
The International, Foodservice, and Natural Foods segment say 10% profit growth in 4Q FY15, follow a 13% increase in 3Q FY15. For FY15 net sales and profit were flay year-over-year. In FY16, foreign currency (Canadian dollar) will be an incremental profit headwind of approximately $20 million, or $0.11 a share. There is not incremental good news in this segment, but looking forward the business will see a higher cost of goods sold due to a significant headwind brought on by foreign currency exchange. Management anticipates growth in the segment going forward, especially with the addition of Big Heart.
HEDGEYE – A brighter spot, but still nothing to get excited about!
OVERARCHING THOUGHTS ON THE CALL
The 4Q FY15 earnings report raised more questions than it answered, and overall, SJM seemed to be playing defense throughout the call. Their outlook seems ambitious, and it is difficult to determine the feasibility of their goals given the company’s recent performance.
Despite a significant decline in the stock since the call, we would not be buyers. Competition is tight and we remain skeptical that their new products will deliver on the intended growth. We’ll stay on the sidelines here and continue to monitor this situation.