Smucker shares plan to strengthen coffee business

by Monica Watrous
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ORRVILLE, OHIO — The J.M. Smucker Co. has brewed up an action plan to revive its ailing coffee business. Segment profit in the recent quarter tumbled 17%, as consumers purchased fewer Folgers products following price hikes to offset higher costs. As a result, Smucker’s net income for the third quarter ended Jan. 31 was $156.3 million, equal to $1.54 per share on the common stock, down 8% from $170.8 million, or $1.63 per share, in the prior-year period. Net sales fell 2% to $1,440 million from $1,465.5 million for the year-ago quarter.

“While we are disappointed with our coffee business for this quarter, we still firmly believe that it’s a great category,” said Richard Smucker, chief executive officer of Smucker, during a Feb. 13 earnings call with financial analysts. “We have grown segment profit in five out of the six years that we’ve owned it. While the category is evolving, we are participating in not just the traditional segment but also in the segments driving category growth.

“With anticipated stabilization in green coffee costs and our current initiatives, we expect to get coffee back on track for next fiscal year.”

While executives expect continued softness in the coffee business for the fourth quarter, driven by ongoing competitive activity, high green coffee costs and reduced promotion effectiveness, the company is addressing current challenges to position the business for longer-term growth.

“First, we remain committed to strengthening the long-term health of our brands through a focus on brand support, innovation, responsible pricing and promotional activities and ensuring our coffee consistently provides the taste profile that consumers come to expect from our brands,” said Vince Byrd, president and chief operating officer for Smucker.

Plans include converting the core Folgers roast and ground coffee lineup to a smaller canister beginning next year.

“We look forward to providing consumers with a lower price point without compromising quality and improving our competitive positioning within mainstream coffee,” Mr. Byrd said.

Given current market conditions for green coffee, management anticipates an improved cost structure in fiscal 2016 that will enable the company to lower prices.

With its Dunkin’ Donuts brand, the company said it is well-positioned in the premium segment and continues to explore opportunities for growth within the partnership.

Finally, Smucker plans to capitalize on the growing convenience trend by expanding its K-Cup platform with new offerings next year.

“Overall we expect our innovation, packaging downsize and projected lower green coffee costs will allow us to grow our coffee segment profit in (fiscal year 2016) at a higher rate than our overall long-term organic growth objective,” Mr. Byrd said.

Segment profit for the U.S. Retail Coffee segment fell 17% to $150.5 million for the quarter, reflecting lower sales volume and the impact of higher costs, which were not fully offset by higher net prices. Segment sales dipped 1% to $561.8 million, as lower volume was mostly offset by higher prices on the majority of the company’s packaged coffee offerings beginning last June and on K-Cup packs beginning in January. The Folgers brand volume declined on consumer response to higher prices for roast and ground coffee, competitive activity and reduced promotional effectiveness. Dunkin’ Donuts packaged coffee volume was flat in the quarter, and the Café Bustelo brand increased 5%. Volume and net sales of K-Cup portion packs declined 3% and 8%, respectively.

“While volume and sales trends showed improvement from the second quarter, coffee results fell slightly short of our expectations for the third quarter,” Mr. Smucker said. “However, we were pleased with the solid performance of all of our other businesses.”

Segment profit for the U.S. Retail Consumer Foods segment advanced 9% to $114.4 million, reflecting lower marketing expenses, favorable mix and higher volume. Sahale Snacks, the company’s acquired snack nut business, contributed modestly to profit in the quarter. Segment sales declined 2% to $549.5 million, driven by lower net price realization for Jif and Crisco brands. Jif volume increased 7%, but net sales decreased 4%, due to a 7% list price decrease on the majority of peanut butter items, plus increased promotional spending. Smucker’s Uncrustables frozen sandwiches volume and sales climbed 10% for the quarter. Smucker’s fruit spreads volume rose 2% while net sales were flat. Crisco brand volume rose 1%, while net sales fell 10%, reflecting the impact of a 9% list price decrease taken in the fourth quarter of 2014. Volume for the Pillsbury brand was flat, and net sales declined 3%.

“In the coming months, we look forward to a couple of key milestones in our consumer foods business,” Mr. Byrd said. “In the fourth quarter, we expect our new peanut butter facility in Memphis, Tenn., to begin production in line with our planned timing. In addition, we are on track to complete the integration of the Sahale Snack acquisition by the end of the fourth quarter and remain excited about the growth opportunities for this business.”

For the International, Food Service and Natural Foods segment, profit increased 13% to $48 million, but net sales fell 3% to $318.7 million. The volume decline reflects the impact of the planned exit of the private label food service hot beverage business and declines in private label natural foods beverages, which offset gains in the Smucker’s portion control items for food service and Five Roses brand.

Due to the pending acquisition of Big Heart Pet Brands, which is expected to close in the fourth quarter, Smucker declined to update its full-year earnings per share guidance, but the company expects a modest decrease in net sales for the fourth quarter, due primarily to softer coffee volume, and a decrease in full fiscal year net sales of nearly 3% over the prior year. Additionally, the company expects coffee segment profit to decline by approximately 15% for the year.
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