Collateral Peanut Damage Dampens Smucker's Outlook

smuckers jellyJ.M. Smucker reported solid performance for its fiscal third quarter, with net sales up 6% excluding its recent Folgers acquisition and currency effects, and up 78% with Folgers included. In total, net sales grew to $1.18 billion and net income increased 84%, to $77.9 million.

Year-to-date net sales, excluding the Folgers acquisition, were up 11%.

No Smucker products have been part of the massive recall of products containing peanuts potentially tainted by salmonella, since Smucker did not use Peanut Corporation of America, the now-in-bankruptcy source of the outbreak, as a supplier.

Nevertheless, the general drop in demand for peanut butter resulting from consumer wariness caused Smucker to adjust its full-year guidance somewhat. The company's FY '09 net sales are now projected at $3.6 to $3.7 billion, down from previous guidance of $3.8 to $4 billion.



Smucker reported that the downward pressures on peanut butter sales created only a slight decline in volume, and U.S. retail dollar sales of Jif actually grew, given pricing increases. However, the pressures on peanut butter volume are expected to continue into the fourth quarter.

Smucker reported that the effect of lost peanut butter sales and margins, along with additional advertising and consumer communication costs involved in reassuring consumers about the safety of Jif and other Smucker products containing peanuts, are expected to result in a negative impact in the range of 5 to 7 cents per diluted share. Non-GAAP income per diluted share is now projected at $3.15 to $3.30.

Smucker emphasized that it remains committed to its long-term strategic objectives of 6% annual sales growth and 8%-plus earnings per share growth.

Overall U.S. retail sales of peanut butter dropped 11.5% during the four-week period ending Jan. 24 (to $72.5 million) compared to the preceding four weeks, and declined by 3.8% compared to the same four-week period in 2008, according to Nielsen data reported by Progressive Grocer. The year-over-year decline was quite significant, given that peanut butter sales prior to the recalls had seen eight consecutive periods of double-digit growth, Nielsen SVP, consumer and shopper insights Todd Hale told the magazine.

However, the temporary effects of the peanut-recall scenario aside, the growing popularity of sandwiches is among the reasons that Smucker is well-positioned, points out Frost & Sullivan research analyst Christopher Shanahan. "Sandwiches are inexpensive, nutritious comfort foods, and consumers are willing to pay a bit more for a trusted brand like Smucker's in jams and jellies, which are affordable, multiple-use products," he says.

Like other CPGs, Smucker has been raising prices to cover increasing input costs and protect margins. Outside of the Folgers acquisition, price increases were the main driver of net sales growth during Q3, accounting for 13% of the total 78% gain. Acquisitions contributed $491.7 million, including $468.5 million from Folgers. Foreign exchange reduced net sales by approximately $16 million.

Q3 earnings per share were down 9% as a result of restructuring and merger and integration costs. Excluding those items, non-GAAP income per diluted share gained 11%.

Companywide, Pillsbury baking mixes and frostings, Hungry Jack pancakes and syrups and canned milk all saw volume increases, reflecting what Smucker's terms "current back-to-home meal trends." Volume declines were concentrated in the oils and flour categories.

U.S. retail market segment net sales (which do not include coffee) were up 9%. Brands in the consumer strategic business area showing gains included Smucker's fruit spreads and Hungry Jack, in addition to Jif. Brands in the consumer oils and baking strategic business showing gains included Pillsbury, Crisco and Eagle Brand canned milk.

For the first nine months, U.S. retail market segment net sales increased 14%, including a 12% gain in the consumer strategic business area and a 15% gain in the consumer oils and baking area.

U.S. retail market segment profit increased 39% for the quarter and 16% for the first nine months. Much of the gain was in the oils and baking area, particularly canned milk.

The U.S. retail coffee market segment contributed $442.9 million to net sales and $90.2 million in segment profit for the third quarter. On a pro forma basis, net sales increased 4%, driven by net sales and margin growth for Dunkin' Donuts coffee.

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