J.M. Smucker’s Q2 Performance and FY24 Outlook

J.M. Smucker (SJM), a renowned consumer-packaged-goods company known for household brands like Jif, Folgers, and Uncrustables, has been in the spotlight recently due to its acquisition of Hostess Brands (TWNK). While the company revised its FY24 (April) adjusted EPS outlook downward as a result of this acquisition, its Q2 (October) performance is grabbing investors’ attention. In this article, we will explore SJM’s Q2 results, the impact of the TWNK acquisition, and the factors that contributed to its recent stock performance.

A Minor Setback with a Major Q2 Win

Despite the adjustment to its FY24 earnings outlook, SJM’s Q2 performance has been reassuring for investors. The company not only exceeded bottom-line estimates but also maintained revenue in line with analyst forecasts. The reduced FY24 earnings outlook is directly attributed to the $5.6 billion acquisition of TWNK. However, if we exclude the dilution effect of this acquisition, SJM would have raised its FY24 outlook to approximately $9.85 at the midpoint, reflecting a substantial 10% year-over-year increase.

The TWNK Acquisition and Stock Movement

SJM’s recent acquisition of TWNK had a notable impact on its stock performance. Since announcing the intention to purchase TWNK on September 11, SJM’s shares had declined by approximately 20%. This decline, coupled with the positive Q2 results, has led to renewed investor confidence in the company.

Q2 Performance Highlights

In Q2, SJM reported several positive highlights that underscored its strong market position and a robust portfolio, even in challenging macroeconomic conditions:

• Adjusted EPS Growth: SJM achieved an 8% year-over-year growth in adjusted EPS, reaching $2.59. This growth includes a headwind of approximately $0.29 related to the termination of a coffee supplier agreement.
• Revenue: Despite macroeconomic challenges, SJM managed to keep its revenue relatively stable, with a 12.1% year-over-year decline to $1.94 billion.
• Comparable Net Sales Growth: SJM’s comparable net sales grew by 7%, aligning with the company’s expectations. This growth was driven by volume gains across its portfolio.
• Segment Performance: Coffee was the only segment to experience a decline in net sales, falling by 3% year-over-year due to an unfavorable 4-point net price realization. U.S. Retail Consumer sales, on the other hand, grew by 7%, supported by positive net price realization, contributing an additional 7 points. Uncrustables, a popular product, showed exceptional growth, with a 22% increase in net sales. Pet Foods also performed well, achieving a 20% year-over-year growth when excluding noncomparable sales related to divested pet food brands. International and Away From Home sales expanded by 13%, excluding noncomparable items.

Revised FY24 Outlook

While SJM did revise its FY24 adjusted EPS forecast downward to a range of $9.25 to $9.65 from the previous range of $9.45 to $9.85, it’s important to note that $0.40 of this reduction is directly related to the TWNK acquisition. The company has maintained its forecast for comparable net sales growth at +8.5% to +9.0%, indicating the continued momentum of its overall business.

The Steady Growth and Dividend Yield

J.M. Smucker has a reputation as a steady grower and provides investors with a solid dividend yield of 3.8%. However, the company’s rapid decline in stock value over the past three months reflected the market’s initial concerns about the TWNK acquisition. CEO Mark Smucker outlined several factors that influenced the decision to acquire TWNK, emphasizing its established position in the snacking market, resilient consumer snacking demand, mutual growth opportunities, and TWNK’s innovative product offerings and expertise in the convenience channel.

While these reasons make strategic sense, the acquisition came at a significant cost, causing SJM’s total debt balance for the combined businesses to rise to around $8.7 billion. In response to this elevated debt level, SJM plans to prioritize debt reduction in the near term, which will result in a halt to its share repurchase program.

Bottom-line: J.M. Smucker’s Q2 performance has provided a ray of hope for investors, overshadowing the downward revision in its FY24 earnings outlook due to the TWNK acquisition. With a history of steady growth and a robust portfolio, the company is navigating through challenging economic conditions. As it continues to integrate TWNK and reduce its debt, SJM remains a formidable player in the consumer-packaged-goods industry, poised for future growth and stability.