MJN’s Guidance for Fiscal 2016: Non-GAAP EPS at $3.48–$3.60



Gross margin benefited

Mead Johnson’s (MJN) gross margin benefited from lower dairy prices in fiscal 4Q15. However, this benefit was adversely affected by foreign exchange impacts. Gross margin was 63.9% in the fourth quarter, rising by 200 basis points from the same quarter in 2014. The factors that had a negative impact on sequential gross margin are benefits from new price rises, increased trade investment in China, and the company’s annual US plant shutdown. These factors were expected and mentioned in the company’s last earnings call.

Also, EBIT (earnings before income and tax) fell 13% in the fourth quarter and fell 7% for fiscal 2015, including currency impacts. The EBIT margin slightly fell to the prior year’s quarter as continued investments were not fully offset by the higher gross margin.

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Among Mead Johnson’s peers in the food and packaging industry, Mondelez (MDLZ) reported a gross margin of 38.9% in its last reported quarter. Hershey (HSY) and Kraft Heinz (KHC) reported gross margins of 45.5% and 26.6%, respectively. The Vanguard Consumer Staples ETF (VDC) invests 3.8% of its portfolio in Mondelez and 2.3% in Kraft Heinz.

Guidance for fiscal 2016

Mead Johnson’s fiscal 4Q15 earnings release provided full year guidance for fiscal 2016. The company expects its fiscal 2016 constant dollar sales to be in a range of 0% to 2% above fiscal 2015. It also expects non-GAAP[1. Generally accepted accounting principles] EPS (earnings per share) in the range of $3.48 to $3.60 based on current exchange rates.

The company also expects to incur charges of ~$25 million to $30 million associated with the Fuel for Growth program in 2016. Specified items, including charges related to Fuel for Growth, are expected to be ~$0.12 per share. Hence, the company expects the GAAP EPS to be in the range of $3.36 to $3.48, excluding mark-to-market pension adjustments that can’t be estimated. EPS guidance includes an anticipated negative impact of current exchange rates as of January 2016 that’s expected to be ~$0.40 per share.

The company views 2016 as a year of transition. It plans to invest heavily in reshaping the portfolio and boost investment in new channels in China. Due to the challenge of the strengthening dollar, MJN expects modest, single-digit EPS growth. The company also expects sales growth to improve in the second half of the year, reflecting the phasing of growth initiatives and investments.


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