Cost savings to drive margins
J.M. Smucker (SJM), like most of its peers, is focusing on cost-saving initiatives to boost margins amid a soft sales environment. The company’s management remained upbeat on margins and expects its adjusted gross margin to expand about 50 basis points YoY (year-over-year) in fiscal 2018. The company’s adjusted operating income is also projected to improve 2.0% YoY, driven by incremental synergies and cost savings.
Near-term outlook remains sluggish
Although the company’s management is guiding for margin expansion in fiscal 2018, the first half of the fiscal year will likely remain challenging. Management noted that most of the incremental synergies and cost savings are expected to benefit the company in the second half of the current fiscal year.
Sluggish sales, lower net price realizations due to increased competition, higher commodity costs, increased marketing spending, and tough YoY comparables will most likely hurt SJM’s margins in the first half of 2018.
During the last reported quarter, SJM’s adjusted gross margin contracted by 20 basis points despite benefiting from the cost-cutting program. Lower sales and a fall in net price realization in the U.S. Retail Pet Foods segment impacted the company’s margins. That’s expected to continue in the first half of the current fiscal year since a sales deleverage will more than offset the benefits from cost savings.