The leading manufacturer of food products, J.M. Smucker (SJM, Financial), posted its second quarter earnings on November 19 that made its stock volatile in the following trading session as the results were a mixed bag and did add to the worries of the investors. In fact, the first half of the 2015 fiscal year has not been as promising as thought of earlier and there are continued headwinds which impacts the top and bottom line of the company which operates in three major segments –Â Retail coffee market, retail consumer foods and international, foodservice and natural foods. Let’s quickly have a look at the numbers posted in the quarter and assess its performance. Also, let’s have a peek into the future outlook portrayed by the company which could give better insight into the management’s mode of thought.
The numbers were alarming
The J.M. Smucker Company reported weaker than expected fiscal second quarter earnings. The Ohio-based company posted a quarterly profit of $158.3 million, or $1.55 per share compared to the year-ago profit of $153.4 million, or $1.46 per share. However, excluding non-recurring items, the adjusted earnings came in at $1.53 a share. This missed the Street estimates which was hooked to earnings of $1.55 a share. This was mainly due to decline in gross profit, driven by the coffee segment lowered sales, and was partially offset by lower marketing expenses.
Also gross margin remained flat at 35.7% due to lower sales volume during the quarter and unfavourable sales mix.
Net sales for the quarter decreased 5% year over year to $1.482 billion, and also missed the Street estimates of $1.52 billion. This decline in revenue has been chiefly attributed to reduction of sales volumes majorly seen in the coffee segment which reported 10% sales decline year-over-year to $533 million, unfavourable sales mix and the negative impact of the previously announced exit of portions in International, Foodservice and Natural Foods segments.
In the coffee segment, the affected brand was the Folgers brand for which segment volumes declined 18% as customers recoiled strongly to rising prices. There was also decline witnessed for the Café Bustelo brand and the Dunkin’ Donuts packaged coffee by 12% and 3% in the quarter, respectively.
CEO Richard Smucker stated during the earnings conference – “Our second quarter fell short of expectations primarily driven by our coffee business, we are confident that this shortfall was a result of short-term challenges and that the fundamentals of our coffee business remain solid.”
However, revenue was mainly driven by K-cup sales which picked up momentum during the quarter as well as sales of Jif peanut butter, Crisco oils, Smucker’s uncrustables frozen sandwiches and R.W. Knudsen Family Beverages which showed volume gains during the quarter.
The acquisitions of Sahale Snacks in September 2014 and Enray Inc. in August 2013 have added a combined $10.2 million to second quarter sales while foreign exchange reduced net sales by $8 million in the quarter. Excluding acquisition, distribution agreement and currency impact, sales declined 5% to $1.479 billion in the quarter.
Guidance for full year slashed
The company expects net sales to decline approximately 1% in this fiscal year, compared to the previous fiscal year. Smucker has reiterated that he expects fiscal 2015 earnings to be in the range of $5.45 a share to $5.65 a share. Investors were a bit perturbed as the company has cut its guidance during the earnings call as it expects the negative impact from higher green coffee costs to continue in the next half of the fiscal year. However, the top brass seem to be upbeat on the sales volume for coffee brands which they state will possibly improve in the second half of fiscal 2015.
As the working capital requirements have kept increasing, the cash generation for the first half of the fiscal year stood at $84 million, which was nominal compared to $168 million generated in the first half of last year. While the management remains upbeat on continued cash generation in the third quarter and the holiday period of the current fiscal year, it has lowered its guidance from the range of $625 million to $635 million to approximately $500 million for the full fiscal year.
Stock market partially reacts
The company stock fluctuated on the day its earnings were out, though its shares were primarily up by 0.08% as the management held on the thought of revival of the majorly contributing coffee segment in the second half of the fiscal year. However, there was a bit of negative sentiment felt in the stock market as the company showed cash depletion in the first half of the fiscal year when compared on a year-over-year basis as its working capital needs has increased reflecting the increasing prices of green coffee costs in inventory as well as certain timing factors. In fact, the stock dipped into the negative territory in the early market trading, though it showed revival signs during the day.
Final word
Currently the company faces headwinds in the coffee segment, but the management is confident of sales revival in this segment during the second half of the fiscal year. True, investors are worried about their investments in the stock which is showing fluctuations as the outlook portrayed by the management is not being regarded as rock solid. But, we need to stay tuned and watch out the third quarter results to take a better investment decision, as both the top and bottom lines might show brisk improvement in the coming quarter.
