Food companies are the happiest ones when it comes to demand for its products. This is obvious since people would cut down on their other unnecessary spending than to curtail having food. However, such retailers have other risks which are higher than the demand problem. For instance, an increase in input costs is one of the prominent problems since it affects the company’s bottom line and the margins.
J.M. Smucker (SJM, Financial) is a typical example here, which is largely affected by increase in green coffee costs. Its recently reported second-quarter numbers reflected the same, the top line missed on the Street’s expectations. However, the company managed to register earnings in line with the estimates. Let’s take a closer look.
The mixed bag of numbers
Revenue for the quarter dropped 5% to $1.48 billion, over last year. Factors which affected the top line were decrease in volumes in the coffee segment, exit of certain businesses in the International, Foodservice and Natural Foods segment, and an unfavourable sales mix.
The gross margin of the company was flat at 35.7% due to lower volume and unfavorable price mix. Even the bottom line was a relief to the company. Earnings were flat at $1.53 per share, as compared to the previous year. This was in line with the analysts’ expectations.
By the segments
The U.S. Retail Coffee segment dropped 10% due to a decline in volumes of 18%. Volumes were affected because the company increased the coffee price by 9%. This scared away customers from its products. Thus, customers shifted to other cheaper brands and even delayed their purchases. Smucker had to increase the prices since green coffee costs had been increasing for quite some time. Hence, in order to save its margins, it increased the prices.
The U.S. Retail Consumer Foods segment also registered a decline of 1% due to lower price realization. Further, the International, Foodservice and Natural Foods segment dropped 2%. On an organic basis, sales dropped 1%, mainly due to a 3% decrease in volumes.
However, there were many categories which registered growth. Demand for products such as frozen sandwiches, Jif peanut butter and R.W. Knudsen Family beverages increased, partially offsetting the decline in the coffee segment. K-cups were one of the best performers during the quarter. Sales of K-cups increased 12% as volumes surged 15%, over last year.
Positive cues
There were some positive factors that worked in favor of the company. For instance, higher coffee promotions helped bring back a few customers. However, it did affect the company’s margins.
One of the biggest strengths of the food retailer was the acquisition of Sahale Snacks in September recently and that of Enray in August last year. These two acquisitions added $10.2 million to the top line and are expected to further help the company expand and grow.
Ending thoughts
The buyouts are going to benefit the company in the long run. Also, coffee prices are expected to get stable in the coming months. This should help the retailer bring its coffee segment back to the growth track. Moreover, K-cups are a relief, enabling the company to reaffirm its guidance for the year. Although Smucker registered a difficult quarter, the above mentioned factors are expected to benefit the company. Therefore, this retailer can be a great pick.
