J.M. Smucker Co. (SJM) is on the Hedgeye Consumer Staples LONG bench.
HEDGEYE OPINION
Low demand for Folgers coffee, Jif peanut butter, and pet foods, namely Kibble ‘n Bits, resulted in sales falling more than expected for the second consecutive quarter. In addition, sales in SJM’s domestic consumer food segment fell, posting sales of $557.3M vs FactSet $591.3. Contributing to this miss was the divestiture of the company’s canned milk business and slowing demand for products under their Pillsbury and Jif brands. The brand saw U.S coffee sales fall 6% as a result of lower prices and volumes for Folgers, and net sales for the pet food business decreased 6%, primarily reflecting volume mix.
Despite these less-than-stellar figures, the company revealed some news that brought a sense of optimism to the call, as they stated that they would be offering premium dog food in grocery and mass outlets through the introduction of their Nature’s Recipe brand in those channels. This offering, along with targeted merchandising programs; expected improvement in peanut butter sales in the second half of the year; commodity inflation in certain categories; and the strong growth of Uncrustables are expected to help return the brand to organic sales growth in the near future.
In reiterating why we have SJM on our LONG bench, the company reported that year-over-year gross margin expansion was realized in all three U.S. retail segments, with coffee leading the way. Contributing to gross margin expansion were reduced manufacturing overhead costs and incremental synergies. According to management, their diligence regarding cost management and a “continuous improvement mindset is greater than ever” and helped the brand realize $29M of incremental synergies, bringing their YTD total to ~$60M. In order for SJM to become a best idea we have to gain conviction that the current sales trends will reverse course, and their investments will yield positive results. Until that point in time we will continue to monitor the name.
Switching gears to Blue Buffalo (BUFF), a name on our Best Ideas list as a SHORT, the SJM call provided a cautionary tale for the pet food industry overall. SJM management spoke to recent slowdowns in the pet superstore channel, which BUFF mentioned as well, but not to the degree that SJM mentioned it. In addition to the slowdown, SJM will be pushing further into the premium dog food category with their Nature’s Recipe brand, which will be heavily supported with a media campaign. This is just one more incremental negative data point for BUFF, as we continue to predict to see a slowdown in the top-line performance of the company.
NOTABLE COMPANY THOUGHTS
“With the anticipated impact of commodity inflation in certain categories, and contributions from the launch of Nature’s Recipe, we continue to project full year’s net sales to be in the range of flat to down 1%,” (Mark Smucker, CEO).
HEDGEYE – Commodity inflation seems like it will continue to be a headwind going forward, but strong growth in their K-Cup and snack food segments should ease this.
“Turning to the pet foods segment, we are excited to share our plans to offer premium dog food in grocery and mass outlets through the introduction of the Nature’s Recipe brand in these channels. Nature’s Recipe, premium pet food has a long history participating in the pet specialty channel and is uniquely positioned to meet the consumers’ increasing desire for natural and wellness offerings at accessible price points,” (Mark Smucker, CEO).
HEDGEYE –It seems as if SJM is now a dog food brand, as the topic dominated the call from start to finish. The announcement should help stabilize their struggling Kibbles ‘n Bits brand, and help the broader dog food portfolio.
“In the second quarter, we realized $29M of incremental synergies, bringing our year-to-date total to approximately $60M. We continue to anticipate $100 of incremental synergies for the full fiscal year, with some potential upside to this estimate,” (Mark Smucker, CEO)
HEDGEYE – With incremental synergies hitting, and possibly exceeding, targets, SJM is displaying an increased efficiency in their business. Increased functionality will undoubtedly be a growth driver going forward.
“Within our customer food segment, the second quarter performance of peanut butter was weaker than last year, with a high single digit volume decline volume decline for the JIF plan. That was partially attributable to the timing of shipments. With upcoming merchandising support, and additional marketing investments, we anticipate peanut butter sales to improve in the second half of the year,” (Mark Smucker, CEO).
HEDGEYE – Management is confident that peanut butter sales will rebound in the second half of the year, as their shipping faux pas will be corrected and additional marketing investments come down the pipeline.
QUICK COMPS
- Revenue: $1.91B vs FactSet $2.00B
- EPS: $2.05 vs FactSet $1.93
- Net Sales
- US Coffee: $551.8M vs FactSet $571.2M
- US Consumer Foods: $557.3M vs FactSet $591.3M
- US Pet Foods $531.0M vs FactSet $553.9M
- International and Foodservice: $273.8M vs FactSet $277.0M
- Operating Income
- US Coffee: $186.5M vs FactSet $183.2M
- US Consumer Foods: $118.9M vs FactSet $115.3M
- US Pet Foods: $114.5M vs FactSet $114.3M
- International and Foodservice: $51.7M vs FactSet $51.6M
- Adjusted gross margin: 39.6% vs FactSet 38.9%
- Adjusted operating margin: 20.7% vs FactSet 19.1%
FY17 GUIDANCE
- Reaffirms adjusted EPS $7.60 - $7.75 vs FactSet $7.67, with bias toward middle to high end of range
- Reaffirms comparable sales of 0% -1% YoY
- Reaffirms Free Cash Flow of $1.0B and CAPEX of $240M
- Tax rate of 33.0% vs prior guidance of 33.5%
- On track to recognize $100M of incremental synergies in FY17
Please call or e-mail with any questions.
Howard Penney
Managing Director
Shayne Laidlaw
Analyst
