The J.M. Smucker Company (SJM) delivered earnings per share (EPS) of $1.04 for its first quarter fiscal 2011 ended July 31, 2010, outperforming the Zacks Consensus Estimate of 95 cents and the year-ago EPS of 92 cents. Stronger margins aided by a lower tax rate drove the outperformance.
For the first quarters of fiscal 2011 and 2010, EPS excluded restructuring and merger and integration costs of 18 cents and 9 cents, respectively. Including these items, the company reported EPS of 86 cents in the reported quarter compared with 83 cents in the year-ago quarter.
Net sales remained almost flat at $1,047.3 million in the quarter as the impact of favorable foreign exchange rates and sales mix offset the impact of the potato business divestiture and an overall 3% decline in volume. The volume decline was driven by the company’s oils and baking brands in the U.S. and Canada. The company, however, achieved volume gains in Folgers and Dunkin’ Donuts brand coffee, Jif peanut butter, Hungry Jack pancake mixes and syrups, and beverages in natural foods.
Expenses and Margin Performance
Cost of products sold, excluding restructuring costs, dipped 2.5% year over year to $629.4 million. Gross profit upped 2.9% to $417.9 million while gross margin expanded 130 basis points to 39.9%.
Selling, distribution and administrative expenses increased 1% year over year to $203.3 million and as percentage of net sales increased to 19.4% from 19.1%. Marketing, selling and distribution expenses remained on par with year-ago levels while general and administrative expenses increased 4%, driven by higher depreciation charges and digital marketing initiatives. Excluding the impact of special items, operating income increased 5.2% to $196.1 million with operating margin expanding 100 basis points to 18.7%.
Interest expense plunged 13% or $2.4 million to $16.5 million due to lower loans outstanding during the quarter compared with the prior-year quarter. Income taxes decreased $6.3 million, leading to an effective tax rate of 31.3% compared with 35.2% in the year-ago quarter. The effective tax rate in the quarter reflects benefits realized from an increased deduction related to the U.S. manufacturing activities versus 2010, together with lower state income taxes and a favorable federal income tax determination related to a prior year.
Segment Performance
The company’s biggest segment, U.S. Retail Coffee Market, reported a 7% increase in sales to $393.6 million aided by a 5% increase in volumes in the Folgers and Dunkin’ Donuts coffee. Further, recent price hikes in coffee averaging 4% also contributed modestly to the increase. Segment profit inched 1% to $111.9 million as higher sales were offset by an increase in green coffee costs. Segment margin contracted 200 basis points to 28.4%.
The U.S. Retail Consumer Market segment’s sales and volume remained flat, excluding potato products divested in the fourth quarter of 2010. Reported segment net sales and volume however dipped 4% and 3%, respectively. Segment profit increased 8% to $71.4 million and segment margin spiked to 25.6% from 22.7% in the year-ago quarter. Additional marketing investments were more than offset by lower raw material costs (primarily peanuts and certain fruits), a decrease in supply chain costs and favorable product mix associated with peanut butter.
Net sales and volume in the U.S. Retail Oils and Baking Market segment were down 11% and 12% respectively, driven primarily by Pillsbury flour and baking mixes and Crisco oils in a continuing competitive and promotional environment. Segment profit declined 12%, mainly due to a decline in net sales and higher production costs as well as unrealized mark-to-market adjustments on commodity contracts. Segment margin contracted 20 basis points to 13.2%.
Net sales in the Special Markets segment remained flat with year-ago levels at $200.6 million. However, excluding foreign exchange, net sales decreased 3%. Volume increased 1%, driven by gains in the natural foods, canned milk, condiments and coffee categories, which offset declines in the flour, oils and foodservice portion control categories. Segment profit increased 31% and segment margin expanded a whopping 400 basis points to 17.4% due to lower supply chain costs, the favorable impact of mix, and unrealized mark-to-market adjustments on commodity contracts.
Cash Position
As of July 31, 2010, Smucker had cash and cash equivalents of $522.7 million compared with $283.6 million as of April 30, 2010. Cash flow from operating activities were $27.2 million, compared with $25.8 million in the same period in 2010. The company uses a significant amount of cash during the first half of each fiscal year, primarily due to seasonal fruit and vegetable procurement, the build-up of inventories to support the Fall Bake and Holiday period, and the additional increase of coffee inventory in advance of the Atlantic hurricane season.
The company expects cash provided by operations in the second half of the fiscal year to exceed the amount in the first half of the year upon completion of its key promotional periods.
Outlook
For fiscal 2011, Smucker expects net sales to increase slightly ahead of the 3% growth indicated in its earlier outlook, mainly driven by its recent pricing actions. Excluding restructuring and merger and integration costs, EPS is expected to range between $4.50 and $4.60, in line with the company’s original estimates.
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