Gross margin fell due to lower sales
Like most of its peers, J.M. Smucker (SJM) is focused on reducing costs to drive profitability amid the slow growth environment. Despite benefiting from the cost-cutting program, the company’s adjusted gross margin fell by 20 basis points to 37.5% during fiscal 4Q17. Lower volume and mix and a fall in price realization in the pet foods segment had a negative impact on the gross margin.
In comparison, Campbell Soup’s (CPB) adjusted gross margin fell by 40 basis points in its the last reported quarter due to a rise in costs and weak volumes. Also, Tyson Foods’ (TSN) gross margin fell by 140 basis points, which reflected lower volumes and increased costs combined with lower average selling prices.
Operating margin expanded
Despite a decline in the gross margin, J.M. Smucker’s adjusted operating margin rose by 70 basis points to 19% due to lower SD&A expenses. By segments, the profit fell 14% YoY (year-over-year) in the coffee segment due to a lower volume and mix, increased marketing expenses, and an unfavorable price-to-cost relationship. Meanwhile, the pet foods segment’s profit fell 15% due to lower net sales, which were partially offset by lower input costs.
In contrast, the consumer foods segment’s profit rose 19% YoY, which reflected productivity savings from efficient supply chain management and price restructuring. The profit was partially offset by a significant rise in marketing spending. Meanwhile, the international and foodservice segment’s profit rose 26% due to a higher volume and mix.
Management expects the adjusted gross margin to rise by 50 basis points for fiscal 2018 despite an increase in commodity costs. The adjusted operating margin is expected to rise 2% in fiscal 2018. The company plans to generate $140 million in savings from its cost reduction program in fiscal 2018, which is expected to cushion margins.
However, lower sales and an expected low single-digit rise in SD&A expenses could have a negative impact on the company’s margins in the coming quarters.