The company reported yesterday comparable organic net sales increased 10% to $2.23bn in its fourth quarter helping its operating income to climb 19% or $125.7m and its earnings per share to increase 18% increase in the period.
The results, which CEO Mark Smucker acknowledged in prepared remarks were “well ahead of our expectations,” as well as that of the street which predicted a 14% fall in net sales. They also helped cushion an anticipated decline in net income, which fell $600.7m in the three months ending April 30 and $91.3m in full fiscal year, reflecting the divestiture of certain pet food brands.
Price hikes reinforce sales figures
The company’s net sales increase was driven by an 11-percentage point increase in net price realization, primarily reflecting list price increases across the portfolio. Within coffee, a 10-percentage point increase to offset higher commodity costs helped lift US retail sales in the segment 7% over the prior year. Likewise, the company’s US retail consumer foods segment’s net sales increased 14 percentage points over the prior year thanks to a 12-percentage point price increase across the portfolio.
Smucker attributed the company’s ability to maintain sales even with higher prices to “the strength of our brands,” which include coffee juggernauts Café Bustelo, Folgers and Dunkin as well as the fast-growing snack brand Uncrustables.
What happens when prices stabilize … or drop?
But while the company may play in categories that are more resilient than others, Morningstar Research Services’ director of consumer sector equity research Erin Lash cautioned the company’s strategy may not serve it long-term.
“We’re skeptical growth can hold at such lofty levels over a longer horizon, even following the sale of its lagging pet food business (which had accounted for 20% of sales),” she noted in a report.
She explained growing “competitive angst throughout the aisles in which [Smucker] competes (coffee, pet, and spreads) is unlikely to remain dormant (as has been the case over the past three years) and could prompt Smucker to lower prices or risk market share losses, particularly as it plays in categories where lower-priced private-label fare has carved out a sizable presence.”
Pamela Kaufman of Morgan Stanley echoed this concern, noting during JM Smucker’s fourth quarter earnings call yesterday that she heard retailer appetite for additional price hikes to offset inflation is waning.
“There’s been investor concern about the current dynamics between retailers and suppliers and that retailers may be adopting a harsher stance around pricing,” she said, asking if this was a “fair” assessment and how Smucker executives would characterize their “current report” with retailers.
CFO Tucker Marshall was quick to underscore Smucker’s “outstanding relationship” with its retail customers.
“As we’ve navigated through … the last couple of years and multiple pricing changes, we have been able to do so effectively and work with them to really pass along those cost increases in a prudent and justified way,” he said.
He dismissed the threat of private label as “relatively low,” and said the company approaches price negotiations with retailers “in the spirit of partnership, as well as making sure that we work with them to only pass along what is truly necessary and justified. And then within our own four walls, manage our costs accordingly as well.”
Marshall also soothed that the company is no longer seeing “material inflation” and has seen “some rate-based improvements in aspects of our cost profile,” which gives the company confidence looking forward.
