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Why J.M. Smucker's Fiscal 2Q18 Results Could Be Disappointing

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Part 4
Why J.M. Smucker's Fiscal 2Q18 Results Could Be Disappointing PART 4 OF 5

Why J.M. Smucker’s Margins Could Remain Muted

What could hurt margins?

J.M. Smucker’s (SJM) fiscal 2Q18 margins could take a hit from lower volumes and higher spending. J.M. Smucker is witnessing soft volumes in the US Retail Coffee segment, which could hurt margins. Meanwhile, higher commodity costs will further pressure margins. Besides, challenges in the US Retail Consumer Foods segment could remain a drag. Also, lower pricing in the Pet segment and an unfavorable mix could adversely impact margins growth and more than offset the benefits of cost and productivity savings measures.

Why J.M. Smucker’s Margins Could Remain Muted

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In comparison, margins of the company’s peers were also affected by rising costs and soft volume trends in the US (SPY). Mondelēz’s (MDLZ) 3Q17 gross margin fell 60 basis points on account of higher input costs. Meanwhile, Hershey’s (HSY) 3Q17 gross margin contracted 30 basis points due to the higher packaging and freight coupled with an unfavorable mix. Also, Kellogg’s (K) 3Q17 gross margin remained flat as price adjustments offset benefits from productivity savings.

Last quarter’s performance and outlook

During the last reported quarter, J.M. Smucker’s adjusted gross margin fell 240 basis points, while adjusted operating margin fell 280 basis points, reflecting lower volumes, an adverse mix, and higher commodity costs. Also, increased promotional and marketing spending further dented the profit margins.

Going forward, J.M. Smucker management anticipates inflation in green coffee costs to subside in fiscal 2H18, which could have a positive impact on gross margins. The company expects its gross margins to expand by 50–75 basis points in fiscal 2018 as inflation in green coffee costs could subside during the second half of the current fiscal year. However, in fiscal 2Q18, increased commodity costs are anticipated to remain a drag.

Moreover, the company’s operating margin is also expected to remain muted in fiscal 2018, reflecting a decline of 20.0% in the coffee segment’s operating profit.

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