Smucker Beats Estimates - Analyst Blog

The J.M. Smucker Company (SJM) delivered non-gaap earnings per share (EPS) of $1.38 for its second quarter fiscal 2011 ended October 31, 2010, outperforming the Zacks Consensus Estimate of $1.31 and the year-ago EPS of $1.22 cents. A lower tax rate and price increases drove the outperformance.

For the first quarters of fiscal 2011 and 2010, EPS excluded restructuring and merger and integration costs of 13 cents and 4 cents, respectively.

Net sales remained almost flat at $1,278.9 million in the quarter as the impact of favorable foreign exchange rates and sales mix offset the impact of the potato business divestiture and an overall 4% decline in volume.

The volume decline was driven by the company's oils and baking brands in the U.S. and Canada. The company, however, achieved volume gains in Folgers and Dunkin' Donuts brand coffee, Jif peanut butter and Smucker's fruit spreads.

Expenses and Margin Performance

Cost of products sold, excluding restructuring costs, dipped 1.8% year over year to $772.2 million. Gross profit and gross margin were flat year-over-year.

Selling, distribution and administrative expenses increased 4% year over year to $222.8 million and as percentage of net sales decreased to 17.4% from 18.2%. Excluding the impact of special items, operating income increased 4.0% to $240.0 million with operating margin expanding 70 basis points to 18.8%.

Interest expense plunged 17% or $5.7 million to $6.8 million due to lower loans outstanding during the quarter compared with the prior-year quarter.

Segment Performance

The company's biggest segment, U.S. Retail Coffee Market, reported a 7% increase in sales to $477.3 million aided by price increase to the tune of 13%. However, volume declined 7%. Segment profit inched 13% to $149.1 million due to the price increases implemented to offset the impact of rising green coffee costs. Segment margin expanded 160 basis points to 31.2%.

The U.S. Retail Consumer Market segment's sales declined by 2% while volume increased1%, excluding potato products divested in the fourth quarter of 2010. Reported segment net sales and volume however dipped 6% and 3%, respectively.

Segment profit increased 5% to $74.3 million and segment margin spiked to 27.3% from 24.3% in the year-ago quarter. Additional marketing investments were more than offset by lower raw material costs (primarily peanuts and certain fruits), a decrease in supply chain costs and favorable product mix associated with peanut butter.

Net sales and volume in the U.S. Retail Oils and Baking Market segment were down 8% and 10% respectively, driven primarily by Pillsbury flour and baking mixes in a continuing competitive and promotional environment. Segment profit declined 10%, mainly due to a decline in net sales and higher production costs as well as unrealized mark-to-market adjustments on commodity contracts. Segment margin contracted 30 basis points to 14.6%.

Net sales in the Special Markets segment increased 4% year-over-year to $249.5 million. However, excluding foreign exchange, net sales decreased 2%. Volume increased 4%, driven by gains in the natural foods, baking and coffee categories. Segment profit increased 24% and segment margin expanded a whopping 310 basis points to 19.8% due to coffee price increases implemented earlier this year, lower flour costs and favorable impact of sales.
 

Cash Position

As of July 31, 2010, Smucker had cash and cash equivalents of $487.4 million compared with $283.6 million as of April 30, 2010. Cash flow from operating activities were $19.5 million, compared with $187.8 million in the same period in 2010.

The company uses a significant amount of cash during the first half of each fiscal year, primarily due to seasonal fruit and vegetable procurement, the build-up of inventories to support the Fall Bake and Holiday period, and the additional increase of coffee inventory in advance of the Atlantic hurricane season.

The company expects cash provided by operations in the second half of the fiscal year to exceed the amount in the first half of the year upon completion of its key promotional periods.

Outlook

For fiscal 2011, Smucker expects net sales to increase slightly ahead of the 3% growth indicated in its earlier outlook, mainly driven by its recent pricing actions. Excluding restructuring and merger and integration costs, EPS is now expected to range between $4.55 and $4.65 per share. Previous guidance was $4.50 and $4.60.