Smucker lowers forecast on continued Folgers weakness

by Monica Watrous
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J.M. Smucker, Folgers coffee and Crisco oil
Weak demand for Folgers coffee and Crisco oils contributed to a disappointing first quarter for The J.M. Smucker Co.
 

ORRVILLE, OHIO — Weak demand for Folgers coffee and Crisco oils contributed to a disappointing first quarter for The J.M. Smucker Co. Net income in the quarter ended July 31 was $126.8 million, equal to $1.12 per share on the common stock, which compared with $170 million, or $1.46, in the year-ago period. Net sales of $1,748.9 million were down 4% from $1,815.8 million.

Adjusted earnings per share was $1.51, down 19% from $1.86 in the prior year and 3% behind the company’s expectations, said Mark R. Belgya, vice-chair and chief financial officer of The J.M. Smucker Co.

For the full year, the company now expects a slight decrease in net sales compared to the prior year, reflecting lower-than-anticipated sales in the first half, Mr. Belgya told investment analysts during an Aug. 24 earnings call.

Mark Belgya, J.M. Smucker Co.
Mark Belgya, vice chair and c.f.o. of The J.M. Smucker Co.

“Factoring this in, we now expect adjusted earnings per share to be in the range of $7.75 to $7.95, representing a 1% decline of the midpoint compared to our original guidance range,” he said.

Shares of J.M. Smucker sank by as much as 9% in afternoon trading on Aug. 24.

During the quarter, volume for Folgers roast and ground coffee fell short of expectations, as net sales dropped 12% from the year-ago period, said Mark T. Smucker, chief executive officer.

Mark Smucker
Mark Smucker, c.e.o. of The J.M. Smucker Co.

“In response, we adjusted everyday and promoted price points on Folgers coffee to improve our competitive positioning,” Mr. Smucker said. “As a result, volume trends improved as we proceeded through the quarter and continuing into August.

“In addition, we are introducing larger canisters on a promotional basis. This is expected to drive further volume improvements in roast and ground. These pricing actions are in advance of the lower green coffee costs we expect to realize later in the fiscal year.”

J.M. Smucker, Dunkin' Donuts coffee and Cafe Bustelo coffee
Sales for Dunkin’ Donuts and Café Bustelo coffee increased by 10% and 12%, respectively.
 

While sales for Dunkin’ Donuts and Café Bustelo coffee increased by 10% and 12%, respectively, U.S. Retail Coffee segment profit decreased by 29% during the quarter, a deeper drop from the company’s projection of 20%, due to lower volume/mix and an unfavorable price-to-cost relationship. Net sales for the segment fell 6% to $480.8 million. 

“We anticipate our pricing and merchandising actions related to Folgers roast and ground coffee will result in improved volume trends in the second quarter, but the unfavorable price-to-cost gap will continue,” Mr. Belgya said. “As a result, we are projecting a high-teen per cent decline in coffee segment profit for the second quarter as compared to the prior year. However, looking at the back half of the year, we expect these profit trends to shift dramatically. This reflects improved economics related to K-Cups, which will begin in the third quarter, and lower green coffee costs, which will mostly benefit the fourth quarter.”

Meanwhile, U.S. Retail Consumer Foods segment profit was flat compared to the prior year, while sales declined 8%, driven by 21% decreases for Crisco and Pillsbury brands.

J.M. Smucker, Pillsbury baking mixes
Persistent competitive activity and soft category performance continued to impact top-line trends for the Pillsbury brand.
 

“For Crisco, a decline was anticipated, reflecting lost distribution at a key retailer in the club channel,” Mr. Belgya said. “For Pillsbury, persistent competitive activity and soft category performance continued to impact top-line trends. 

“Also contributing to lower consumer foods sales in the quarter were declines across several natural foods brands and a 4% decrease for the Jif brand, both of which are expected to be mostly timing-related. For the Smucker's brand, lower fruit spread sales were mostly offset by a 13% increase for Uncrustables frozen sandwiches.”

Elsewhere in the portfolio, U.S. Retail Pet Foods segment profit declined 20% on lower pricing and increased marketing expense, while net sales increased $2.2 million to $521.7 million. International and Away From Home segment profit declined 3%, while net sales increased 3% to $254 million, reflecting favorable volume and mix driven by Jif and Smucker’s brands.

J.M. Smucker, Sahale Snacks, Uncrustables, Cafe Bustelo
The company plans to invest in emerging growth brands such as Café Bustelo, Sahale Snacks and Smucker’s Uncrustables.
 

In the coming quarters, the company plans to launch “significant platform innovations” across some of its larger, iconic brands, including Jif and Folgers, while continuing to invest in emerging growth brands such as Café Bustelo, Sahale Snacks and Smucker’s Uncrustables, Mr. Smucker said. Additionally, the company has restructured its organization within e-commerce, with centralized resources focused on marketing, innovation and supply chain initiatives across all brands and businesses.

“E-commerce sales for our pet food brands grew 85% in the quarter, while coffee sales in the channel more than doubled,” Mr. Smucker said. “With just under 2% of our sales coming from e-commerce, there’s plenty of upside in the next few years.”

The company remains on track to achieve $140 million in incremental synergies and cost savings targeted for the fiscal year, Mr. Smucker said.

J.M. Smucker e-commerce
The J.M. Smucker Co. has restructured its organization within e-commerce.
 

“We are well down the path of transforming our company with new capabilities, a clear strategic plan and specific actions to ensure sustainable long-term growth,” Mr. Smucker said. “We participate in excellent categories with a mix of leading brands and expanding on-trend brands. We are capitalizing on current consumer and retail trends, increasing our focus on faster-growth areas.

 “And finally, we are confident in delivering on our three key financial priorities of top-line growth, achieving significant cost savings and delivering earnings per share growth in line with our stated long-term objective.” 
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