SLE Hillshire Brands Company

The J.M. Smucker Company (SJM) delivered fourth-quarter 2012 adjusted earnings (excluding restructuring, merger and integration charges) of $1.10 per share, which exceeded the Zacks Consensus Estimate by 11 cents, driven by robust sales growth. The results also surpassed the prior-year quarter's adjusted earnings of $1.00 per share.

However, the adjusted earnings includes the loss of $11.3 million due to the sale of the Europe's Best frozen fruit and vegetable business in fiscal year ended 2012, and a non-cash impairment charge of $17.2 million occurred in the fiscal year ended 2011.

Revenue Details

Net sales in the quarter increased 14% year over year to $1.36 billion. The results marginally exceeded the Zacks Consensus Revenue Estimate of $1.35 billion. The increase was primarily driven by pricing actions and the benefits from acquisitions.

The company completed its acquisition of Rowland Coffee Roasters Inc. on May 16, 2011, and the North American foodservice coffee and hot beverage business from Sara Lee Corporation (SLE) on January 3, 2012. The acquisitions have contributed $28.4 million to net sales.

Excluding acquisitions, divestiture and foreign exchange, net sales increased 5% to $1.23 billion in the fourth quarter. The overall sales volume was disappointing, particularly of products like Jif peanut butter, Pillsbury baking mixes and Folgers coffee. Volume plummeted 7% in the reported quarter, owing to significantly higher retail prices and the weak economic environment.

Fiscal 2012 Results

Smucker posted fiscal 2012 adjusted earnings of $4.73 per share, which exceeded both the Zacks Consensus Estimate and the prior-year's earnings of $4.69 per share. Net sales in the fiscal year 2012 increased 14.5% year over year to $5.53 billion. The Zacks Consensus Revenue Estimate was $5.52 billion.

The positive growth in net sales was helped by the acquisition impact of the Rowland Coffee brands and the Sara Lee business.

Margin Details

Excluding special project costs, gross margin contracted 310 basis points (bps) to 33.7% in the fourth-quarter 2012 due to higher costs for green coffee and peanuts. Operating margin, excluding the impact of the project costs, contracted 90 basis points to 15.8%.

Segment Performance

U.S. Retail Coffee Market: The company’s biggest segment, U.S. Retail Coffee Market, reported a 7% increase in sales to $542.2 million, aided by price increases. The acquisition of Rowland Coffee contributed approximately $24.0 million to segment net sales. Volume decreased 8% in the fourth quarter of 2012, excluding Rowland Coffee.

The segment’s operating margin contracted 10 bps to 23.1% in the quarter, due to volume declines.

U.S. Retail Consumer Foods: The U.S. Retail Consumer Foods segment’s sales soared 5% to $463.2 million, driven by higher price realization. However, volumes declined 11%.

The segment’s operating margin shrinked 230 bps to 19.8% in the quarter, primarily due to volume declines. Further, higher commodity costs overshadowed the price increases taken on peanut butter, leading to the decline.

International, Foodservice and Natural Foods: Net sales in the International, Foodservice and Natural Foods segment increased 47% over fourth quarter of 2011 to $349.9 million. Excluding the impact of acquisitions, divestiture, and foreign exchange, segment net sales increased 9% led by a 4% increase in volume.

The segment’s profit margin declined 300 bps to 14.9% in the fourth quarter of 2012, partially reflecting the acquisition of the lower-margin Sara Lee foodservice business.

Other Financial Updates

During the fourth quarter, Smucker repurchased 3 million shares for approximately $225.3 million. The company now has 3.9 million common shares remaining for repurchase under its Board authorization.

Fiscal 2013 Guidance

Following the robust fourth-quarter and fiscal 2012 results, the company has raised its sales guidance for fiscal 2013, and expects its net sales to increase 7% over the prior-year period. The sales guidance reflects the expected net sales contribution from the Sara Lee business.

The fiscal 2013 adjusted earnings, excluding special project costs of 50 cents per share, is expected to range from $5.00 to $5.10 per share. The special project costs for fiscal 2013 would also include costs that the company expects to incur related to its initiative to settle certain pension liabilities.

Currently, we hold a Zacks #3 Rank (short term Hold rating) on Smucker. Over the long term, we provide a Neutral recommendation on the stock.

 
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