The J.M. Smucker Company (SJM - Analyst Report), a leading manufacturer of food products, posted better-than-expected earnings and revenues in the first quarter of fiscal 2016, primarily on the back of recent acquisitions and the launch of Dunkin’ Donuts K-cup pods. Smucker licenses Dunkin’ Donuts from Dunkin’ Brands Group, Inc. (DNKN - Snapshot Report).

Adjusted earnings of $1.32 per share exceeded the Zacks Consensus Estimate of $1.22 per share by 8.2% in the first quarter and declined 1% in the prior year. Adjusted earnings, excluding amortization, were $1.60 per share, which increased 7% from the prior-year quarter owing to impressive top-line growth and improvement in operating profits.

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Revenue and Margin Details

Net sales in the first quarter increased 47% year over year to $1.95 billion and exceeded the Zacks Consensus Estimate of $1.89 billion by 3.3%.

The increase was driven by favorable volume and mix led by the launch of Dunkin' Donuts K-Cup pods during the quarter. Net price realization was up 1%, as the impact of higher coffee net price realization was partially offset by lower net pricing for peanut butter.

The recent acquisition of Big Hearts Pet Brand (Mar 2015) contributed $561.3 million while Sahale Snacks (Sep 2014) added $7.7 million to first quarter sales. However, foreign exchange reduced net sales by $14.4 million in the quarter. Excluding acquisition and currency impact, sales increased 6% in the quarter.

Adjusted gross profit increased 48% owing to the addition of Big Heart and launch of Dunkin' Donuts K-Cup pods. Net price realization was higher and offset the impact of net higher costs, which were attributed to green coffee.

Adjusted operating profit increased a significant 37% to $303.1 million despite higher general and administrative expenses.

Segment Performance

Effective from May 1, 2015, Smucker modified its reportable segments. The U.S. Retail Consumer Foods reportable segment now includes the Natural Foods business, previously included in the former International, Foodservice, and Natural Foods reportable segment.  International and Foodservice is now a combination of all remaining businesses.

The company added the U.S. Retail Pet Foods segment after the acquisition of Big Heart. This will represent the sale of pet food and pet snacks to retail customers in the U.S. Pet food and pet snack sales to other than domestic retail customers are included in the International and Foodservice segment.

U.S. Retail Coffee Market: The company's biggest segment, U.S. Retail Coffee Market, reported 12% growth in sales to $565 million mainly driven by the introduction of Dunkin' Donuts K-Cup pods during the quarter. The Folgers brand also contributed to net sales growth as higher net price realization more than offset lower volume.

The higher price realization resulted from an increase in packaged coffee prices of Folgers and Dunkin' Donuts branded products by an average 9% in Jun 2014 (Read: Smucker Raises Coffee Price) and from an increase in K-cup prices in the U.S. by an average 8% in Jan 2015 (Read: J.M. Smucker Raises Prices of K-Cup Packs by 8%). While the hike in coffee costs resulted in higher price realization during the quarter, it led to a significant decline in coffee volumes.

We note that in July, this coffee company lowered packaged coffee prices of the majority of its products sold in the U.S., primarily consisting of items under the Folgers and Dunkin' Donuts brands. However, the company expects the impact of reduced coffee costs to be evident from the second quarter of fiscal 2016.

Segment profit increased 13% to $155.1 million, reflecting higher net price realization, which more than offset higher green coffee costs.  Dunkin' Donuts K-Cup pods also contributed to profit growth.

U.S. Retail Consumer Foods: U.S. Retail Consumer Foods segment sales remained flat at $582.2 million as lower net price realization in the Jif brand was offset by favorable volume/mix led by Jif peanut butter and Smucker's Uncrustables frozen sandwiches. The Sahale business also added $6.8 million to sales.

Segment profit decreased 1% to $117.5 million as lower net price realization and higher manufacturing overhead costs associated with the new Memphis, TN, peanut butter facility more than offset overall lower commodity costs, primarily for peanuts, milk, and oils, and the impact of favorable volume/mix.

U.S. Retail Pet Foods: Segment net sales were $549.9 million in the quarter, which marked a mid-single digit percent growth compared to Big Heart's results in the prior year. The net sales increase was driven by distribution gains in the Natural Balance brand and growth in Milk-Bone dog snacks, which more than offset declines in Kibbles 'n Bits dry dog food.

Segment profit was $90 million in the first quarter. It also increased compared to Big Heart's previously reported results, driven by favorable volume/mix, along with lower marketing and commodity costs.  This more than offset lower net price realization.

International and Foodservice: Net sales in the International and Foodservice segment increased 7% from the previous year quarter to $254.9 million, driven by contribution from Big Heart and Sahale acquisitions, favorable volume/mix and higher net price realization. However, these were mostly offset by currency headwinds.

Segment profit was flat at $30.5 million, as an increase in Foodservice profit and the addition of Big Heart were offset by higher costs in Canada, currency headwinds and higher green coffee costs.

Outlook for Fiscal 2016

The company reaffirmed its guidance for fiscal 2016. The company continues to expect net sales of approximate $8.0 billion, an increase of 40% from 2015 levels, reflecting a full year contribution from Big Heart of approximately $2.4 billion.

Adjusted earnings are expected in the range of $6.80 to $6.95 in 2016, excluding special project costs, $25 million of synergies related to the Big Heart acquisition and amortization charges. The company remains on track to deliver annual synergies of $200 million by the end of 2018. This marks an increase of approximately 15% from the comparable measure in 2015.

Smucker currently has a Zacks Rank #3 (Hold).

Some better-ranked food companies include Omega Protein Corp. (OME -Snapshot Report) and Flower Foods, Inc. (FLO - Snapshot Report). While Omega Protein sports a Zacks Rank #1 (Strong Buy), Flower Foods carries a Zacks Rank #2 (Buy).

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