Pandemic beneficiary? (SJM)
J.M. Smucker reported FQ2 EPS of $2.39, up 6% YOY vs. consensus of $2.23. Sales increased 4%, driven by the Coffee, Consumer, and International Retail businesses. E-commerce grew 45% YOY and now represents 11% of U.S. retail sales. Management is guiding F21 to $8.55-8.85, up from the prior range of $8.20-8.60 and consensus of $8.64. Q3 EPS is expected to be down MSD% YOY. Sales are expected to grow 1-2%, up from prior guidance of flat to up 1%. The guidance does not include the impact of selling the Crisco oils business, which contributes $100M of revenue and $.20 of EPS to the fiscal year and $270M and ~$.50 of EPS on a full year.
In the pet segment, cat food grew 9% while dog snacks grew 3%. Coffee sales grew 9%, with consumers consuming at home instead of the workplace. The consumer foods segment grew 12%, driven by Uncrustables’ growth of 16%. International and Away from Home sales decreased by 10%. Gross margins expanded 20bps due to volume and mix, but management’s outlook is for contraction in the second half of the fiscal year due to increased ad spend in pets, freight expense, and the Q4 volume comparison.
J.M. Smucker does not fit neatly into the group of consumer staples companies benefiting from the pandemic or the smaller group that will have easier comparisons and a tailwind from a vaccine. We are in the camp that the company is a net beneficiary and view our short bias position as appropriate for 2021. For example, the 24% growth in Dunkin’ Donuts coffee this quarter will reverse when people return to their pre-pandemic work routines. The company is hosting an analyst day on Dec. 10.
McCormick makes it muy Caliente (MKC)
McCormick announced it would acquire Cholula Hot Sauce for $800M from L Catterton. Cholula is expected to have revenue of $96M. The acquisition is expected to be accretive in 2021 despite a valuation of 25x adjusted EBITDA. That implies a spicy 33% EBITDA margin. It is made in Mexico, has a high value per weight, small size, and is shelf-stable. Management expects synergies ($10M) and tax attributes ($43M) to bring the multiple down to 18x. Hot sauce has been a high growth category, and Cholula has been leading. McCormick’s distribution across the foodservice channel and relationships with grocers should lead to revenue synergies. 40% of consumers discover the brand at restaurants, and the ACV is ~60, so there is still some room for improvement in food retailers. Cholula is complimentary to McCormick’s Frank’s Red Hot by adding a strong West Coast presence, a strong Mexican cuisine presence, and demographics.
McCormick has a proven track record with these bolt-on acquisitions like with Frank’s Red Hot three years ago. Kraft Heinz and Conagra, among others, were said to have looked at the acquisition as well. The acquisition multiple is lofty, but this is one of those deals that likely looks good years from now – especially if the synergies are improved upon. There is definitely an element of the premium multiple for lower execution risk. The deal also fits with McCormick’s own acquisition strategy of finding targets that contribute to sales growth, margin expansion, category, and geographic expansion, and it is in the flavor category.
Turkey plans – more, but smaller (KR)
According to Nielsen, 70% of Americans plan on a Thanksgiving with fewer than six people compared with 48% last year. According to NPD, two-thirds of Americans plan to celebrate in their own homes, up from 48% on average over the past three years. With the increase in first-time turkey chefs, Whole Foods and Progressive Insurance offered a turkey protection plan to compensate buyers for overcooked or undercooked turkeys with a $35 gift card. Many farmers slaughtered their turkeys weeks earlier to keep their sizes down, but demand for smaller turkeys still exceeded demand. Kroger increased its order for the number of turkeys, but at smaller sizes. 46M turkeys are eaten over the holiday, and it is difficult to change production plans. Turkeys raised for Thanksgiving are generally hatched in the summer. Omaha Steaks is best known for beef, but this year it offered three-pound turkey breasts for the first time to cater to small gatherings. On the bright side, retailers have cut whole turkey prices by ~7% to an average of $1.21 per pound, the lowest since 2010, according to the American Farm Bureau Federation.
