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Smucker's Buyouts Bode Well, Baking Unit Divestiture a Concern

Zacks Equity Research

The J. M. Smucker Company SJM is being weighed down by lower net price realization as well as adverse impacts of the sale of its U.S. baking unit. Nonetheless, it is managing to keep the business afloat on strong brand portfolio, bolstered by acquisitions and prudent innovations. Let’s delve deeper.

Strategies Aiding Growth

Smucker actively pursues acquisitions in the United States as well as overseas. We note that the buyout of Ainsworth has been bolstering performance of the U.S. Retail Pet Foods category as well as the company’s top line. Other noteworthy acquisitions of Smucker include Big Heart Pet Brand, Sahale Snacks, Enray Inc as well as coffee brands and business operations of Rowland Coffee. The acquisitions added iconic brands to the company’s portfolio and strengthened revenue prospects.

Additionally, Smucker formed partnerships with quite a few coffee companies. The company’s agreement with Keurig Green Mountain and Dunkin’ Brands Group, Inc to manufacture and sell the K-Cup category of products has been yielding positive results since fiscal 2016. The company also engages in innovations to meet consumers’ changing preferences. It is on track to launch products under banners such as Folgers, Milk-Bone and Nutrish. Moreover, Smucker is gaining from growth in the e-commerce channel. In the digital realm, coffee and pet food categories have been steadily expanding.

These apart, the company’s cost-saving initiatives are worth mentioning. In fiscal 2019, it delivered savings of nearly $30 million through the right-spend program. Going ahead, management is focused on cost-reduction and optimization efforts to ensure greater profitability. Other food companies such as General Mills GIS, United Natural Foods UNFI and Kraft Heinz KHC are also adhering to savings plans to fuel growth.

Baking Unit Sale & Lower Price Realization Are Ailments

Smucker’s top line has been hurt by lower net price realization for the past few quarters. The same also weighed upon the company’s U.S. Retail Coffee, U.S. Retail Consumer Foods, International, and Away from Home categories in the first quarter of fiscal 2020. Persistence of such headwinds is concerning.

Moreover, the divestiture of the U.S. baking business has been adversely affecting Smucker’s top line, as witnessed in the first quarter of fiscal 2020. This is likely to prevail, as evident from management’s drab sales outlook for fiscal 2020. The sales view includes loss of $105.9 million, stemming from the divestiture of the U.S. baking business and non-comparable sales associated with Ainsworth. Apart from these, planned exits of some of the pet food products have also been dragging and are expected to adversely impact sales in the fiscal second quarter.

Nevertheless, we expect Smucker’s well-chalked efforts to boost portfolio and savings to help cushion the aforementioned headwinds. That said, we expect the company to maintain strong foothold in the food space.

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