J.M. Smucker Tops Q4 Earnings & Sales On Buyout, Volume

The J.M. Smucker Company (NYSE:SJM) , a leading manufacturer of food products, posted better-than-expected earnings in the fourth quarter of fiscal 2016, primarily driven by gains from the acquisition of Big Heart Pet Brands (Mar 2015) and favorable volumes owing to lower green coffee costs.

Adjusted earnings (including amortization) of $1.86 per share exceeded the Zacks Consensus Estimate of $1.19 per share by 56.3% in the fourth quarter. It was also much better than the prior-year loss of 41 cents per share. Adjusted earnings, excluding amortization, were $2.23 per share, as against prior-year quarter’s loss of 20 cents owing to the benefit from Big Heart operations and a gain from the U.S. canned milk divestiture. Impressive top-line growth and improvement in operating profits also aided earnings growth.

Revenue and Margin Details

Net sales in the fourth quarter increased 25% year over year to $1.81 billion. It also exceeded the Zacks Consensus Estimate of $1.74 billion by 3.9%.

The increase was driven by the acquisition of Big Heart Pet Brands and contribution from Dunkin' Donuts K-Cup pods (launched in May 2015). Smucker licenses Dunkin’ Donuts from Dunkin’ Brands Group, Inc. (NASDAQ:DNKN) .

The acquisition of Big Heart Pet Brands contributed $336.9 million to fourth quarter sales. Excluding Big Heart, the impact from foreign currency exchange, and the impact of the U.S. canned milk divestiture, net sales increased 5%.

The company witnessed a favorable volume/mix driven by the contribution from Dunkin' Donuts K-Cup pods. However, net price realization was slightly lowerdue to lower net pricing on coffee, which was mostly offset by increases in several other categories.

Adjusted gross profit increased 48% to $681.7 million owing to the addition of Big Heart and favorable volume/mix. Net price realization was lower and was offset by a reduction in commodity costs, mainly green coffee.

Despite higher selling, general and administrative expenses, adjusted operating profit increased a significant 102% to $280.8 million owing to the Big Heart acquisition.

Segment Performance

U.S. Retail Coffee Market:The company's biggest segment, U.S. Retail Coffee Market, reported 9.4% growth in sales to $512.6 million, mainly driven by the Dunkin' Donuts K-Cup pods, which led to favorable volume/mix. The Folgers brand also contributed to net sales growth as volume gains on mainstream roast and ground offerings more than offset declines in Folgers K-cup pods. Favorable volume/mix for the segment was slightly offset by lower net price realization for the Folgers brand.

The lower price realization was due to reduced packaged coffee prices of the majority of its products sold in the U.S. recently, primarily consisting of items under the Folgers and Dunkin' Donutsbrands. While lower coffee costs resulted in lower price realization during the quarter, it also led to an increase in coffee volumes.

Segment profit increased 39.4% to $153.2 million, reflecting the net benefit of lower commodity costs and pricing and the contribution from Dunkin' Donuts K-Cup pods. These factors were slightly offset by an increase in marketing expense.

U.S. Retail Consumer Foods:U.S. Retail Consumer Foods segment sales declined 2% to $473.7 million due to the U.S. canned milk divestiture. Excluding the impact of the divestiture, net sales increased 5%. Net price realization was higher, primarily attributable to the Jif and Pillsbury brands. Volume/mix was also favorable driven by Jif peanut butter and Smucker's Uncrustables frozen sandwiches.

Segment profit decreased 6% to 89 million, primarily reflecting the loss of U.S. canned milk profits.

U.S. Retail Pet Foods:Segment net sales were $562.9 million in the quarter, which represented an approximate 3% increase compared to the fourth quarter of the prior year, including Big Heart's sales occurring prior to the completion of the acquisition. The net sales increase was primarily driven by growth in the Natural Balance brand and pet snacks, partially offset by declines in mainstream dog food.

Segment profit was $116.6 million in the fourth quarter.

International and Foodservice:Net sales in the International and Foodservice segment increased 0.9% from the previous year quarter to $258.4 million, as currency headwinds and lower net price realization more than offset the contribution from Big Heart acquisition, favorable volume/mix.

Segment profit grew 8% to $33 million, benefiting from favorable volume/mix, partially offset by higher costs attributed to sourcing certain products from the U.S. and currency headwinds.

Fiscal 2016 Results

Adjusted earnings (including amortization) of $6.57 per share exceeded the Zacks Consensus Estimate of $5.76 per share by 14.1% in the fiscal year. It also increased significantly by 69.3% from the prior-year earnings.

Net sales increased 37% year over year to $7.811 billion. It also exceeded the Zacks Consensus Estimate of $7.768 billion by 0.6%.

Outlook for Fiscal 2017

The company has provided its fiscal 2017 net sales and earnings outlook. Net sales are expected to decrease 1% in fiscal 2017. Adjusted earnings are expected to range from $7.60 to $7.75.

Smucker currently has a Zacks Rank #3 (Hold).

Some better-ranked food companies include Post Holdings, Inc. (NYSE:POST) and B&G Foods, Inc. (NYSE:BGS) . Both of them sport a Zacks Rank #1 (Strong Buy).