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Why J.M. Smucker’s Earnings Could Continue to Fall

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Current trends and outlook

J.M. Smucker’s (SJM) adjusted EPS (earnings per share) results have fallen for the past three quarters, and for fiscal 2Q18, management expects SJM’s adjusted EPS to decline by high single digits as lower margins, especially in its US Retail Coffee segment, are likely to take a toll on its bottom-line performance.

Higher operational costs on account of increased promotional and marketing spending and competitive pricing in SJM’s Pet segment are also expected to restrict EPS growth.

For fiscal 2018, SJM’s management expects EPS to be in the range of $7.75–$7.95, down from its earlier guidance of $7.85–$8.05, as an anticipated decline in profits from its US Retail Coffee segment will likely affect overall EPS.

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This comes in stark contrast to packaged food peers Conagra Brands (CAG), Kraft Heinz (KHC), Kellogg (K), and General Mills (GIS), which have managed to report improved bottom-line performances despite lower sales. SJM’s peers are projected to report improved EPS in coming quarters as they have been focused on reducing costs, while innovative new product launches are expected to boost bottom-line growth for these peers.

Digging deeper

J.M. Smucker’s profitability is taking a hit from lower volumes and rising costs. The company is witnessing a decline in volumes across its key business segments. Meanwhile, unfavorable mix and higher input costs (mainly of green coffee) are more than offsetting the benefits rising from its cost-cutting measures.

The company’s management projects a 20% decline in the operating profit of its coffee segment, which will likely adversely impact its bottom line. Lower volumes and mix, unfavorable pricing, and higher prices of green coffee are expected to take a toll on the segment’s profitability as well, but the management expects inflation in green coffee costs to subside as the year progresses. However, lower volumes will likely remain a drag.

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