US: Competition prompts Smucker to cut sales, earnings forecasts

By Dean Best | 14 February 2014

Smucker saw third-quarter sales fall 6% after it lowered prices

Smucker saw third-quarter sales fall 6% after it lowered prices

US food group JM Smucker has lowered its forecasts for annual sales and earnings after a third quarter in which revenues fell.

The cuts hit Smucker's shares, which were down more than 5% in trading in New York today (14 February).

The company believes net sales for its current financial year will fall 5% on the previous 12 months.

The Jif peanut butter maker also lowered its non-GAAP income per diluted share estimate to a range of $5.55 to $5.60, excluding special project costs of approximately $0.20 per diluted share. The previous estimate was a range of $5.72 to $5.82.  

Smucker pointed to its third-quarter results, including an unplanned trade spending accrual adjustment and lower volume expectations for its fourth quarter. The group said it was facing "a more competitive pricing environment in key categories".

Net sales fell 6% to $1.47bn in Smucker's third quarter, which ran until 31 January. Smucker pointed to a 6% fall in prices after it lower prices, notably on coffee and peanut butter.

Operating income was up 2% at $263.5m. Net income grew 8% to $166.7m. 

CEO Richard Smucker said: "We continue to navigate through a challenging operating environment. This journey is supported by our leading market position with strong and healthy brands. Our innovation pipeline is extensive and our new products are winning with customers."

Shares in Smucker were down 5.48% at $89.93 at 12:15 ET.

Show the press release
- Q3 EPS up 12 percent; Q3 EPS up 13 percent excluding special project costs
- Q3 net sales decrease 6 percent reflecting price declines
- Company updates full year 2014 guidance

 

 

ORRVILLE, Ohio, Feb. 14, 2014 /PRNewswire/ -- The J. M. Smucker Company (NYSE: SJM) today announced results for the third quarter ended January 31, 2014, of its 2014 fiscal year.  Results for the quarter and nine months ended January 31, 2014, include the operations of Enray Inc. ("Enray") since the completion of the acquisition on August 20, 2013, and the impact of the Company's licensing and distribution agreement with Cumberland Packing Corp.("Cumberland"), which commenced on July 1, 2013.

Executive Summary

 

 



Three Months Ended January 31,


Nine Months Ended January 31,



2014


2013


% Increase
(Decrease)


2014


2013


% Increase
(Decrease)



(Dollars in millions, except per share data)














Net sales

$  1,465.5


$  1,559.6


(6%)


$  4,376.3


$  4,558.0


(4%)

Operating income

$     263.5


$     258.3


2%


$     727.6


$     696.4


4%


% of net sales

18.0%


16.6%




16.6%


15.3%



Net income:













Net income

$     166.7


$     154.2


8%


$     446.7


$     413.9


8%


Net income per common share - assuming dilution

$       1.59


$       1.42


12%


$       4.24


$       3.78


12%













Operating income excluding special project costs 

$     273.5


$     266.3


3%


$     754.1


$     746.2


1%


% of net sales

18.7%


17.1%




17.2%


16.4%



Income excluding special project costs:













Income

$     173.5


$     159.3


9%


$     464.5


$     446.8


4%


Income per common share - assuming dilution

$       1.66


$       1.47


13%


$       4.41


$       4.08


8%

 

  • Third quarter net sales decreased 6 percent in 2014, compared to 2013, reflecting pricing actions taken since the beginning of the third quarter of 2013 and the impact of the planned exit of certain portions of the Company's business in its International, Foodservice, and Natural Foodssegment.  The impacts of volume, excluding the planned exits, and mix changes were not significant to net sales in the third quarter of 2014. 
  • Operating income excluding the impact of restructuring, merger and integration, and certain pension settlement costs ("special project costs") increased 3 percent in the third quarter of 2014, compared to 2013, reflecting gains in gross profit and lower corporate administrative expenses. 
  • Income excluding special project costs increased 9 percent in the third quarter of 2014, compared to 2013, reflecting the increase in operating income and further impacted by lower interest expense. 
  • Third quarter income per diluted share, excluding special project costs, increased 13 percent in 2014, compared to 2013, benefiting from the Company's share repurchase activities over the past year.

"We achieved record third quarter earnings per share and made good progress against our strategic plan," commented Richard Smucker, Chief Executive Officer.  "We continue to navigate through a challenging operating environment.  This journey is supported by our leading market position with strong and healthy brands.  Our innovation pipeline is extensive and our new products are winning with customers.  We continue to optimize our supply chain which, over time, improves our cost structure, margins, and cash flow, and positions us for future growth." 

"Our overall retail business was solid for the quarter led by volume growth in U.S. retail coffee, our largest business segment," stated Vince Byrd, President and Chief Operating Officer.  "We also drove growth in a number of our core categories as a result of the increased level of quality merchandising achieved during the holiday season.  We underperformed in our foodservice and spreads businesses, but view these as near-term issues.  While the fourth quarter will be a difficult financial comparison, we are optimistic about our prospect for growth as we head into the new fiscal year."

Net Sales

 



Three Months Ended January 31,


Nine Months Ended January 31,



2014


2013


Increase (Decrease)


%


2014


2013


Increase (Decrease)


%



(Dollars in millions)


















Net sales

$   1,465.5


$    1,559.6


$             (94.1)


(6%)


$   4,376.3


$    4,558.0


$       (181.7)


(4%)

Adjust for certain noncomparable items:

















Enray acquisition

(14.7)


-


(14.7)


(1%)


(26.0)


-


(26.0)


(1%)


Cumberland distribution agreement

(9.0)


-


(9.0)


(1%)


(21.6)


-


(21.6)


0%


Foreign exchange

8.3


-


8.3


1%


15.9


-


15.9


0%

Net sales adjusted for certain noncomparable

items

$   1,450.1


$    1,559.6


$           (109.5)


(7%)


$   4,344.6


$    4,558.0


$       (213.4)


(5%)


















Amounts may not add due to rounding.
















Net sales decreased 6 percent in the third quarter of 2014, compared to the third quarter of 2013, primarily due to the impact of a 6 percent reduction in net price realization reflecting price declines taken since the beginning of the third quarter of 2013, notably on coffee and peanut butter.  A combined $23.7 million from the acquired Enray business and the Cumberland distribution agreement contributed positively to net sales in the third quarter of 2014.  The unfavorable impacts of mix and foreign exchange each reduced net sales by 1 percent in the third quarter of 2014, compared to the third quarter of 2013.

Volume gains realized in Crisco® oils, Folgers® coffee, and the Robin Hood® brand were offset by declines in Pillsbury® baking mixes and flour, and the impact of the previously announced business exits in the International, Foodservice, and Natural Foods segment.

Margins

 


Three Months Ended January 31,


Nine Months Ended January 31,


2014


2013


2014


2013


(% of net sales)









Gross profit

37.2%


34.4%


36.3%


34.0%

Selling, distribution, and administrative expenses:








    Marketing 

5.4%


4.8%


5.5%


5.1%

    Selling

3.5%


3.3%


3.5%


3.3%

    Distribution

2.7%


2.6%


2.8%


2.6%

    General and administrative

5.5%


5.4%


5.8%


5.3%

Total selling, distribution, and administrative expenses

17.1%


16.1%


17.6%


16.2%

Amortization

1.7%


1.6%


1.7%


1.6%

Other restructuring, merger and integration, and special projects costs

0.5%


0.4%


0.5%


0.9%

Other operating income - net

(0.0%)


(0.3%)


(0.0%)


(0.1%)

Operating income

18.0%


16.6%


16.6%


15.3%









Amounts may not add due to rounding.








Gross profit increased $9.0 million, or 2 percent, in the third quarter of 2014, compared to 2013, due to lower commodity costs.  Excluding special project costs as previously defined, gross profit increased $10.7 million, or 2 percent, during the same period.  Unrealized mark-to-market adjustments on derivative contracts contributed $4.5 million to the increase in gross profit as the impact was a gain of $4.0 million in the third quarter of 2014, compared to a loss of $0.5 million in the third quarter of 2013.

Commodity costs were a net benefit to gross profit as lower costs, primarily for green coffee, peanuts, and oils, were not entirely offset by lower net price realization across the portfolio.  The additions of Enray and Cumberland also contributed to gross profit in the third quarter of 2014, but were more than offset by the impact of the exited businesses in the International, Foodservice, and Natural Foods segment. Gross profit was reduced by an unplanned adjustment which impacted net sales by approximately $10 million, primarily related to the Company's foodservice hot beverage business trade spending accrual.

Selling, distribution, and administrative expenses were flat in the third quarter of 2014, compared to the third quarter of 2013, and increased as a percentage of net sales from 16.1 percent to 17.1 percent.  Marketing expenses increased 5 percent in the third quarter of 2014, compared to 2013.  General and administrative and distribution expenses decreased 4 percent and 2 percent, respectively, in the third quarter of 2014, compared to 2013, while selling expenses increased 1 percent.

Operating income increased $5.2 million in the third quarter of 2014, compared to 2013.  Excluding special project costs in both periods, operating income increased $7.2 million, and increased from 17.1 percent of net sales in the third quarter of 2013 to 18.7 percent in the third quarter of 2014. 

Interest Expense and Income Taxes
Net interest expense decreased $5.4 million reflecting the impact of an interest rate swap the Company entered into earlier in the fiscal year, converting a portion of its debt from fixed-rate to variable-rate.

Income taxes were flat in the third quarter of 2014, compared to 2013, as an increase in income before income taxes was offset by a lower effective tax rate.  The effective tax rate decreased from 34.1 percent in the third quarter of 2013 to 32.3 percent in 2014. 

 


Segment Performance

 

 




Three Months Ended January 31,


Nine Months Ended January 31,




2014


2013


% Increase (Decrease)


2014


2013


% Increase (Decrease)




(Dollars in millions)















Net sales:













U.S. Retail Coffee 

$     578.9


$     627.7


(8%)


$ 1,688.2


$ 1,771.0


(5%)


U.S. Retail Consumer Foods

$     557.8


$     581.3


(4%)


$ 1,706.8


$ 1,729.0


(1%)


International, Foodservice, and Natural Foods 

$     328.8


$     350.6


(6%)


$     981.3


$ 1,058.0


(7%)















Segment profit:













U.S. Retail Coffee 

$     182.3


$     175.2


4%


$     508.9


$     459.8


11%


U.S. Retail Consumer Foods

$     105.6


$     106.2


(1%)


$     301.2


$     325.1


(7%)


International, Foodservice, and Natural Foods

$       44.8


$       49.8


(10%)


$     135.6


$     148.7


(9%)















Segment profit margin:













U.S. Retail Coffee 

31.5%


27.9%




30.1%


26.0%




U.S. Retail Consumer Foods

18.9%


18.3%




17.6%


18.8%




International, Foodservice, and Natural Foods

13.6%


14.2%




13.8%


14.1%



 

U.S. Retail Coffee
The U.S. Retail Coffee segment volume increased 2 percent in the third quarter of 2014, compared to the third quarter of 2013, led by increases of 4 percent in the Folgers® brand and 8 percent in Dunkin' Donuts® packaged coffee.  Lower price realization and mix caused segment net sales to decrease 8 percent in the third quarter of 2014, compared to the third quarter of 2013.  Pricing actions taken to reflect the pass through of lower commodity costs included both a price decline of approximately 6 percent taken in February 2013 and incremental promotional spending during the recent holiday season.  Net sales of K-Cup® packs decreased 3 percent while volume increased 2 percent compared to last year's third quarter.  Net sales of Folgers® Gourmet Selections® K-Cup®packs increased 4 percent in the third quarter of 2014, compared to the third quarter of 2013, offset by a decrease in the Millstone® branded offerings.

The U.S. Retail Coffee segment profit increased 4 percent in the third quarter of 2014, compared to record profits in the third quarter of 2013, as increased volume, the net benefit of lower green coffee costs relative to price realization, and decreased marketing expenses and manufacturing overhead were only partially offset by unfavorable mix.  Unrealized mark-to-market adjustments on derivative contracts were a gain of $1.2 million in the third quarter of 2014, compared to a gain of $0.3 million in the third quarter of 2013. 

U.S. Retail Consumer Foods
The U.S. Retail Consumer Foods segment volume for the third quarter of 2014 was flat, compared to the third quarter of 2013.  Segment net sales decreased 4 percent in the third quarter of 2014, compared to 2013, primarily reflecting the impact of lower net price realization.  Smucker's® fruit spreads and Jif® brand volume decreased 2 percent and 1 percent, respectively, in the third quarter of 2014, compared to 2013.  Pricing actions taken since the beginning of the third quarter of 2013 caused net sales for both brands to decrease 7 percent over the same period.  Net sales and volume of Smucker's®Uncrustables® frozen sandwiches achieved another strong quarter, up 18 percent and 19 percent, respectively.

Segment results in the baking aisle were mixed.  Crisco® brand volume increased 12 percent, while net sales increased 2 percent impacted by lower price realization in the third quarter of 2014, compared to 2013.  Net sales and volume for the overall Pillsbury® brand both decreased 9 percent.  Net sales and volume gains were realized in Pillsbury® frostings, but were more than offset by declines in flour and baking mixes which were attributed to deeper promotional pricing by competitors in these categories that the Company chose not to match.  Canned milk net sales increased 5 percent and volume was flat during the third quarter of 2014, compared to 2013. 

The U.S. Retail Consumer Foods segment profit decreased $0.6 million, or 1 percent, in the third quarter of 2014, compared to the third quarter of 2013, due to increased manufacturing overhead, marketing expenses, and other segment support costs.  Segment profit benefited from overall lower commodity costs, primarily for peanuts, oils, and flour, which were not entirely offset by lower price realization.  Unrealized mark-to-market adjustments on derivative contracts were a gain of $0.6 million in the third quarter of 2014, compared to a gain of $0.4 million in the third quarter of 2013. 

 

International, Foodservice, and Natural Foods
Net sales in the International, Foodservice, and Natural Foods segment decreased 6 percent in the third quarter of 2014, compared to 2013.  Excluding the impacts of Enray, Cumberland, and foreign exchange, segment net sales decreased 11 percent.  The net sales decrease was driven by the exited portions of the Company's hot beverage business and Smucker's® Uncrustables® frozen sandwiches with foodservice customers, the previously discussed unplanned trade spending accrual adjustment of approximately $10 million, and unfavorable sales mix.  Segment volume decreased 2 percent, excluding the impact of Enray and Cumberland, as increases in the Robin Hood® and Five Roses® brands in Canada were more than offset by the impact of the exited foodservice businesses.

Segment profit decreased $5.0 million, or 10 percent, in the third quarter of 2014, compared to 2013, due to the trade spending accrual adjustment, the lost profit on the exited foodservice businesses, and an increase in marketing expenses.  Foreign exchange also negatively impacted segment profit.  Overall commodity costs were lower in the third quarter of 2014, compared to 2013.  The additions of Enray and Cumberland were not significant to segment profit in the third quarter of 2014.  Unrealized mark-to-market adjustments on derivative contracts were a gain of $2.2 million in the third quarter of 2014, compared to a loss of $0.5 million in the third quarter of 2013. 


Other Financial Results and Measures

 

 



Three Months Ended January 31,


Nine Months Ended January 31,



2014


2013


%  Increase (Decrease)


2014


2013


%  Increase (Decrease)



(Dollars in millions)














Net cash provided by operating activities

$     421.1


$     324.0


30%


$     589.1


$     683.6


(14%)














Free cash flow

$     355.6


$     276.0


29%


$     440.2


$     537.1


(18%)














EBITDA

$     329.9


$     319.2


3%


$     920.0


$     884.4


4%


% of net sales

22.5%


20.5%




21.0%


19.4%



 

Cash provided by operating activities and free cash flow were $421.1 million and $355.6 million in the third quarter of 2014, an increase of $97.1 millionand $79.6 million, compared to 2013, respectively.  The increase in both measures was primarily due to a lower amount of cash required to fund working capital, mostly due to a decrease in inventory levels and commodity costs.  

During the quarter ended January 31, 2014, the Company repurchased approximately 0.6 million common shares for $61.4 million utilizing cash on hand. 

 

Outlook 
The Company reduced its net sales projection for fiscal 2014 to reflect a 5 percent decrease from 2013.  The Company also lowered its non-GAAP income per diluted share estimate to a range of $5.55 to $5.60, excluding special project costs of approximately $0.20 per diluted share.  The previous estimate was a range of $5.72 to $5.82.  The updated guidance reflects the Company's third quarter results including the unplanned trade spending accrual adjustment, lower volume expectations for the fourth quarter, a more competitive pricing environment in key categories, and foreign exchange headwinds.

"While we expect our fourth quarter earnings to be down compared to a strong quarter last year, we want to reiterate that our business fundamentals remain sound and our prospects for ongoing earnings growth continue," commented Richard Smucker. "Our confidence is supported by aggressive innovation plans, a more stable cost environment, and strategic deployment of our strong cash flows.  We are well positioned for future growth."

Original source: JM Smucker

Sectors: Bakery, Condiments, dressings & sauces, Dairy, Financials

Companies: JM Smucker

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