Shares of J.M. Smucker Co. (SJM) rose as much as 11% Thursday
after the company's fiscal fourth-quarter earnings more than
doubled, smashing analysts' estimates, boosted in part by its
November acquisition of Folgers.
The growth of the company's coffee segment hints that consumers
could be making a frugal switch from buying their daily cup of java
at leading stores, such as Starbucks Corp. (SBUX) and Panera Bread
Company (PRNA), and instead brewing a pick-me-up at home.
Some experts have seen a widespread, overall decline in coffee
sales, however, recent data from Information Research Inc., a
market tracking system for supermarkets, show the actual quantity
of coffee being consumed at home has increased. An uptick of that
sort could also signal that rival Kraft Food Inc.'s (KFT) Maxwell
House brand may benefit from similar volume growth.
Chairman and Co-Chief Executive Timothy P. Smucker said Thursday
in a conference call that the company is well prepared for the
at-home consumption coffee trend, which he expects will continue as
the category improved at double-digit levels in April.
"While this magnitude of gain may be difficult to repeat, this
quarter's result in coffee solidifies our belief in the transaction
and provides evidence that our ownership of Folgers will provide
significant opportunities," said Smucker. He added the company
expects to achieve its $80 million synergy target by the end of
this fiscal year.
During the call, Richard K. Smucker, executive chairman and
co-chief executive, reiterated his plans that he presented earlier
this month at the William Blair conference to build out the
company's coffee segment. The group expects to complete the
integration of its inventory and accounting management system that
accounts for the purchase of raw coffee by fall 2009. It will also
seek to capitalize on the gourmet coffee segment by growing the
Dunkin' Donuts business, in which it holds the rights to sell the
Dunkin Donuts coffee brand in retail stores.
There also are plans to grow the company's core "red can"
business, which is its classic roast and ground version of Folgers
coffee that represents 70% of its U.S. retail coffee business.
Smucker's declined to offer additional details about how they would
foster segment growth.
Shares of the jam and jelly maker closed up 9.6% to $47.86,
extending Wednesday's minor gains of 1.3%. Earlier the stock rose
as much as 11% to an intraday high of $48.68. Shares of the company
have risen 28% in the last three months.
Stephens Inc. analyst Farha Aslam said Smucker's increased focus
on the coffee business, in terms of sales execution, combined with
consumers trading out of coffee houses into retail coffee brands
and favorable raw coffee prices benefiting margins, boosted Folgers
results.
According to Aslam, citing IRI data, the overall volume of
supermarket coffee sales in the last month has risen 17%
year-over-year. During that same period, Smucker's volume of sales
has climbed 32%, while Kraft Foods' rose 20%.
Smucker stands to brew even stronger results in fiscal 2010.
"The very strong results in the fiscal fourth quarter helped the
company's cash position," said Aslam. "So going forward they are
going to be able to benefit from lower debt levels and reduced
interest expense, which is going to support earnings in the fiscal
2010 year."
She added there isn't much chance of the company raising its
retail coffee prices as the overall move in commodity coffee prices
have not been significant enough to change pricing on the entire
portfolio.
With prices expected to remain at steady levels, more java
junkies will continue to trade down to cheaper brands. NPD Group
representative said many consumers have already began shifting to
hamburger-quick service restaurants, such as McDonald's Corp.
(MCD), to make their purchases. According to NPD, within the last
year total coffee servings at hamburger restaurants have risen 5%,
donut restaurants climbed 13%, but gourmet coffee and tea
restaurants declined 7%.
The company also projected earnings for the new year above
estimates - $3.65 to $3.80 a share - with revenue of $4.5 billion.
Analysts surveyed by Thomson Reuters expected earnings of $3.37 and
revenue of $4.7 billion.
Smucker - which makes its eponymous jam, Jif peanut butter and
Crisco oils - has sought in recent years to expand by buying up a
series of food and consumer brands, many of which were dumped by
its much larger competitors.
Smucker said the company's core business continues to be solid
and the recently added coffee business has exceeded its
expectations.
For the period ended April 30, the company reported income of
$94.3 million, or 80 cents a share, up from $37.1 million, or 67
cents a share, a year earlier. Per-share results didn't increase as
much because of the stock issued in the Folgers deal. Excluding
restructuring and merger costs, earnings rose to $1.02 from 73
cents.
Net sales soared 81% to $1.07 billion, with acquisitions,
including Folgers, contributing $474.3 million.
Analysts were expecting earnings of 63 cents and revenue of $997
million.
Gross margin jumped to 37.4% from 30.9% on the Folgers deal.
Increased prices and acquisitions have been helping the company
offset the impact of higher marketing and food costs.
Volume rose in several categories, including Pillsbury baking
mixes and frostings, Hungry Jack products and Eagle Brand condensed
milk, though it declined in oils and peanut butter.
Net sales in the U.S. retail market - the company's largest -
rose 5% on higher prices.
Smucker in November acquired Procter & Gamble Co.'s (PG)
Folgers coffee business for $2.65 billion in a move that was
expected to nearly double its annual sales. The Folgers deal capped
off a string of acquisitions that included ConAgra Foods Inc.'s
(CAG) Knott's Berry Farm food brand.
-By Aja Carmichael, Dow Jones Newswires; 212-416-2187;
aja.carmichael@dowjones.com;
(Kerry E. Grace also contributed to this report.)