Smucker’s JM (SJM) wins on demand despite cost hurdles
The JM Smucker Company SJM benefited from its focus on core priorities, the relaunch of the out-of-home division and cautious buyouts and alliances. These benefits are likely to work well for the business amid growing cost challenges and supply chain bottlenecks. Let’s go deeper.
Things are working well for the JM Smucker
The JM Smucker is making good progress with its core priorities, which include driving business excellence, redesigning the portfolio, streamlining the cost structure and unleashing its organization to win. The strength of these strategies helps SJM meet complex supply chain challenges. It also helps the company improve in-store fundamentals and brand inventory performance. The company is implementing inflation-justified pricing actions across all businesses with less than expected elasticity impacts.
In its most recent earnings call, management noted that it increased or maintained market share of 68% of its U.S. retail revenue in the third quarter of fiscal 2022. is committed to increasing its focus and resources to reshape the portfolio to achieve sustainable growth. in the categories of pet food and pet snacks, coffee and snacks. In addition, to streamline costs, management has optimized its supply chain, reduced discretionary costs and increased network production efficiency. Management expects SD&A spend to decline 10% in FY2022, reflecting gains from cost management and organizational restructuring programs, reduced marketing spend, lower incentive compensation and lower discretionary spending.
To reshape the portfolio, The JM Smucker completed the divestiture of the Private Label Dry Pet Food business and the Natural Beverage and Grains business in the third quarter of fiscal 2022. Previously, management had divested the Natural Balance business Premium Pet Food in February 2021. Additionally, the company sold its Crisco oils and shortenings business to B&G Foods BGS in December 2020. Previously, The JM Smucker divested its US canned milk and bakery businesses. Such moves will help the company focus on its resources and portfolio in the pet food, snacks and coffee categories. Additionally, SJM has formed key partnerships with a number of coffee companies. In this regard, the company’s alliance with JDE Peet’s is remarkable. Additionally, the company’s agreement with Keurig Green Mountain (KGM) and Dunkin’ Brands Group, Inc, to manufacture and sell the K-Cup product category has yielded positive results since fiscal 2016.
JM Smucker is benefiting from the revival of the out-of-home division. This was seen in the third quarter of fiscal 2022, as net sales increased 13% to $265.6 million in the International and Out-of-Home segment. Management said the company’s out-of-home sales were back to around 95% of pre-pandemic levels, with liquid coffee and portion-control spreads the main contributors to the recovery.
JM Smucker expects to see continued strong demand for its products. Management remains encouraged by its overall coffee portfolio, as coffee-at-home habits created during the pandemic are likely to continue. On a comparable basis, net sales for fiscal 2022 are expected to improve by nearly 4.5% at the midpoint of the adjusted earnings per share (EPS) guidance range. This should be supported by a rebound in out-of-home channels, increased net pricing across multiple categories, improved volume/mix for core brands in every U.S. retail unit, and continued net sales growth at two digits for SJM’s Uncrustables brand. These are likely to be partially offset by a deceleration in home consumption and supply chain headwinds (which are likely to impact the pet food business of the company).
The JM Smucker faces cost inflation and supply chain and transportation issues, as well as isolated labor shortages. In the third quarter of fiscal 2022, adjusted gross profit fell 8% to $712.3 million. Adjusted gross profit margin decreased to 34.6% from 37.3% in the prior year quarter. This is due to the high cost of raw materials and ingredients, manufacturing, packaging and transportation, as well as a lower volume/mix. Apart from that, the comparison with divestiture earnings also had an impact on the gross margin growth. These were somewhat offset by price actions. Adjusted operating income decreased 6% to $377.9 million. Adjusted operating margin was 18.4%, compared to 19.4% in the prior year quarter, due to a lower gross margin.
Adjusted gross margin is expected to reach nearly 35% in fiscal 2022, with cost inflation expected to have a low double-digit impact on total cost of goods sold. In the fourth quarter, management expects gross margin to decline by approximately 350 basis points (bps), primarily due to inflated green coffee costs.
Other companies struggle with cost issues
Several other food companies are struggling with cost challenges. Conagra Brands CAG has been dealing with cost of goods sold inflation for some time now. Despite increasing its FY22 organic net sales guidance, Conagra reduced its adjusted operating margin and EPS view due to higher cost of goods sold inflation and business lag additional pricing. Although CAG is taking the necessary pricing and cost-saving measures, these are not likely to fully offset input cost inflation in fiscal 2022 due to a lag between the announcement and the implementation of these measures.
B&G Foods is also battling cost inflation. In the fourth quarter of fiscal 2021, BGS’s gross margin of 19.7% contracted by 160 basis points. Gross margin in the fourth quarter of 2021 was impacted by higher than expected input cost inflation. B&G Foods expects input cost inflation to have a huge effect on the entire industry in fiscal 2022.
KelloggK’s gross margin in the fourth quarter of 2021 was impacted by accelerating market-driven cost inflation, supply chain disruptions and costs related to the US grain strike . Kellogg expects cost inflation to hit double digits, with first-half inflation outpacing second-half inflation in 2022. K expects to see bottlenecks and persistent shortages in the supply chain at least until the first half of 2022.
Coming back to The JM Smucker, the aforementioned benefits are likely to help the company hold firm despite cost headwinds.
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