Smucker (SJM 105.92, +4.86, +4.81%), the marketer of well-known brands like Folger's, Jif, Smucker's,
Milk-Bone, and many others, reported impressive upside 3Q19 results before the
open this morning, sending shares sharply higher. The strong results come on
the heels of the weak quarterly report from peer, Kraft Heinz (KHC), on
February 21, in which the company not only missed on both the top and bottom
lines, but it also took a massive $15.4 bln write-down on goodwill primarily
related to its Kraft and Oscar Mayer brands.
KHC's disastrous report sent shares of SJM spiraling lower that day too. However, with SJM's strong report, it has become evident that KHC's woes are more company-specific and that SJM's product portfolio is better aligned to succeed in today's marketplace.
Over the past couple of years, SJM has prioritized what it calls its "growth brands", which include its healthy pet food and snacks lines, as well as its coffee products. It has done this by ramping up marketing efforts around these brands while implementing new tools to get a quicker and better read on how its marketing is performing. Additionally, SJM bought premium pet food company Ainsworth for $1.7 bln.
Pet food and pet snacks has become one of the fastest growth categories in the food and beverage industry, and Ainsworth's Rachel Ray Nutrish brand is driving significant growth within the premium pet food segment of this category. This acquisition is paying considerable dividends for the company and was a major factor in today's upside report.
Simultaneously, the company has divested under-performing businesses that it believes have sub-par growth potential and are not in line with today's consumer trends. This most notably includes its July 2018 divestiture of its baking business (Pillsbury, Hungry Jack, White Lily, etc.) to private equity firm Brynwood Partners.
In contrast, KHC continues to struggle with the changing consumer dynamics as people seek out healthier alternatives. Its core brands, like Jell-O, Kool-Aid, and Oscar Mayer aren't exactly known for their healthy attributes.
In short, SJM's results illustrate that through its brand reshaping efforts, the company is better positioned to capitalize on the higher-growth categories within the packaged food industry.
3Q19 Results and Outlook
For the quarter, SJM posted EPS of $2.26, easily beating the $2.02 consensus. The better-than-expected earnings performance was driven by stronger net sales growth, as described below, gross margin improvement, the achievement of acquisition synergies from its Ainsworth purchase, and the benefit of consolidating certain geographic locations. Additionally, its marketing spend wasn't quite as high as it had anticipated because some expense shifted into Q4 as delayed retailer shelf resets slowed some of SJM's product launches and the accompanying marketing support.
Adjusted gross margin expanded by 20 basis points to 38.6% as favorable volume/mix, particularly in coffee and consumer foods, as well as lower costs, pushed margins slightly higher.
Taking a look at the top line, revenue was up 5.7% yr/yr to $2.01 bln,
edging out the $1.99 bln consensus. Much of this growth was driven by its
Ainsworth acquisition as sales in its pet foods segment jumped by 35%. Nutrish
in particular was a stand-out brand with net sales up 23% from last year,
generating robust growth across all segments at dog food, cat food, and snacks.
Another area of strength for SJM came from its U.S Retail Coffee segment. Dunkin' branded coffee (which is licensed to SJM for sale within retail channels) saw a 9% increase in sales, bolstered by strong performance across the premium bag products, as well as its recently launched canister offerings. Additionally, its K-Cup sales continued to outperform the market with sales up 4%, driving by repeat purchases of its 1850 branded coffee.
In all, SJM's "growth brands" achieved solid growth of 17% during the quarter and the company is anticipating further growth of 18% for these brands in FY19.
On the topic of its outlook, SJM reaffirmed its guidance for FY19, seeing EPS of $8.00-$8.20, ahead of the $7.98 consensus, on revenue of $7.9 bln versus the $7.8 bln expectation. As the company continues to focus on higher growth product categories, it plans to boost its marketing investments to support its brands. This quarter, the company's marketing expense increased by $30 mln, but, SJM commented during its earnings call that a higher-level of support coupled with a more agile go-to-market approach is needed to achieve its high-single digit net sales growth goal.
Lastly, SJM has been focusing more on the e-commerce channel, which has been key in its efforts to connect with consumers for its 1850 and Jif Power-Up products. Management commented during the earnings call this morning that SJM continued to achieve very strong e-commerce growth in both coffee and Pet Food as its brands continued to keep pace with or exceed their respective categories online growth.
Of course, what immediately stands out here is how much better SJM performed during the quarter compared to its much larger peer KHC. It seems clear that –,at the moment, SJM's product portfolio is better aligned for growth and is having more success in meeting consumers' changing tastes. Management has done a very good job realigning its brands, both through organic means and through acquisitions, while also keeping a lid on costs. All in all, it was a very solid performance for SJM and FY19 is shaping up as a promising year for the company.