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Tickers in this Article: SJM, DF, SLE, KFT, KO, PEP, GIS, TAP
JM Smucker's (NYSE:SJM) first quarter profit rose, as did revenue. Although revenue increased, sales volume was down, as the revenue increase came from higher pricing. Like most food companies, Smucker has been wrestling with the issue of how much to pass along rising commodity prices. (For more on the rising cost of commodities and its effect to your, check out 5 Groceries Going Up In Price This Summer.)

TUTORIAL: Earnings Quality

Net Sales and Earnings Rise, Sales Volume Falls
Smucker's non-GAAP diluted earnings per share was $1.12, compared to $1.04 per share for last year's same quarter, first quarter of fiscal 2011. The non-GAAP EPS excludes restructuring costs per share of 14 cents and 18 cents respectively for this year's quarter and last year's. Net income was $111.5 million, up from $102.9 million. Net sales rose 14%, from $1.047 billion in last year's quarter to $1.189 billion in this year's quarter. Volume gains in Pillsbury baking mixes and natural foods beverages were offset by volume declines in Folgers Coffee, Jif Peanut Butter and Crisco oils.

Coffee Price Story
Recently the company announced a 6% decrease in its coffee prices, which follows four increases that began in May, 2010. Smucker's struggle with rising input costs reflects an ongoing battle with commodity cost increases which had resulted in the company raising prices on many of its brands, including its coffee which is central to its business. Consumers reacted to the coffee price increases by buying less, as sales volume for Smucker's coffees fell by 8%.

Food Producers and Costs
This issue of input costs versus pricing, or how much the weary consumer can bear, continues as a large issue for food producers. Dean Foods (NYSE:DF) had robust topline growth of 11.6% year over year in its most recent earnings, mostly on the basis of pass-through commodity costs to consumers. The food producers are experiencing this a bit differently from each other as to their top and bottom lines. Sara Lee (NYSE:SLE), had a notable time lag effect between commodity cost increases and product price increases, so still managed impressive operating income increases. Although Sara Lee is divesting itself of some operations, investors should ask whether the mega food company, Kraft Foods' (NYSE:KFT), upcoming spin-off into a global snacks business and a grocery business will furnish any answers on the input cost and price issues. But this is a game in which the food producers, as Smucker is having to do, will have to come to terms with how much the consumer can take.

The dual-edged commodity price increases eventually hits both producers and consumers, time lag effect notwithstanding. It can affect some companies more than others. Smucker is having to retrench its coffee prices, and is responding to this. Already in the quarter its margins were affected, as its gross profit margin fell to 36.3% from 39% in the year ago quarter. The shaving of gross margins has been happening at Coca Cola (NYSE:KO) and Pepsico (NYSE:PEP), for example, while corn and grain users such as General Mills (NYSE:GIS) and Molson Coors (NYSE:TAP) have thus far increased theirs. For the food producers, the length and depth of this economic weakness, especially if it leads to a global recession, will of course be a key to how they make out beyond the short term, quarter-to-quarter readings. Commodity prices may also moderate in the face of persistent economic weakness.

Smucker Outlook
The company said its coffee price cuts would dampen some of the previously forecast 20% revenue growth by several percentage points for the rest of the year. The market focused on the pricing and sales volume issues, as despite an earnings beat, the stock lost $5.54 per share to $70.02 on the day earnings were released. Smucker is still a strong, viable company, but investors should monitor closely as it navigates through these choppy pricing waters. (For more on investing, read Buying Stocks When The Price Goes Down: Big Mistake?)

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