J.M. Smucker Lays The Coffee Grounds

Packaged food firms have had a number of obstacles to overcome in the past year or so. Many are seeing consumers embrace more affordable private-label brands after struggling with high commodity inflation last year. In contrast, J.M. Smucker (NYSE:SJM) has been focused on integrating a giant acquisition that looks to be transforming it for the better.
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Quarterly Review
Reported sales advanced 58% to $1.05 billion on the acquisition of Folgers. Excluding the Folgers purchase, net sales fell 1% as volume growth of 2% was more than offset by price decreases in the U.S. retail oils and bakery products segment, which posted a 2% decline in sales and accounted for 18% of quarterly sales. "Higher promotional spending in certain categories" also reduced sales somewhat. The U.S. retail consumer market, which consists of consumer brands such as Jif peanut butter, Smucker's jams and jellies and Hungry Jack pancakes, posted strong 6% sales growth on a 7% improvement in volumes. This segment accounted for 28% of sales.

Folgers retail sales now account for the bulk of sales and accounted for 35% of the first-quarter top line. It is also the most lucrative unit and posted a quarterly profit margin of 34.8%. Retail consumer was the second most profitable and posted a 23% margin. The special market unit also now includes certain Folger revenue and this positively impacted segment sales to the tune of $32.9 million, or 16% of quarterly unit sales. Profit in this and the retail oil and baking market both came in at around 14% of sales.

One-time Folgers merger and integration charges took a bite out of profits, but operating margins still came in at 16%. The end result was reported earnings of 83 cents per diluted share. Excluding charges, earnings were 92 cents, which handily beat analyst projections of 80 cents. In contrast, rival Sara Lee (NYSE:SLE) recently posted disappointing earnings on anemic top-line trends thanks to the recession and firm-specific challenges. Kellogg (NYSE:K) and Unilever (NYSE:UN) (NYSE:UL) are also struggling to boost sales as consumers focus on private-label and lower-priced food but remain focused on cost-cutting to grow profits.

Smucker management is currently projecting full-year sales of $4.5 billion and earnings between $3.65 and $3.80, which excludes 17 to 19 cents of one-time merger charges. It expects $80 million in synergies related to the Folgers transaction.

Bottom Line
The magnitude of the first-quarter earnings outperformance at Smucker was impressive, as was the pay down of $75 million in long-term debt. The company also recently increased its dividend, which now represents a dividend yield of 2.8%. Smucker still has work to do to fully integrate Folgers, but indications are that targets are being met and management has confidence that higher levels of profitability are here to stay, thanks to the acquisition of a lucrative brand and opportunity to trim fat for the benefit of shareholders. (For more, see Earnings Forecasts: A Primer.)

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