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SJM AT A GLANCE

P/E ► 19.9 AVG EV/EBITDA ► 10.0 AVG ROA ► 6.8% AVG ROE ► 9.4% AVG Debt to Equity ► 0.636 AVG Current Ratio ► 1.44 AVG Interest Coverage Ratio ► 7.85 AVG

 

 

 

 

 

 

JM Smucker Company (SJM) is a leader in the market for branded food products and has built the trademark Smucker’s into a household name. The company sells kitchen staples like peanut butter, fruit spreads, cooking oil, and baking goods, and it has diversified its portfolio in recent years into special markets like organic and natural foods, beverages, and international sales. Smucker’s brands are competitive in their respective niches, selling in the first or second positions in nine of the twelve industries in which the firm operates.

JM Smucker Co. has been in business for over 100 years, capitalizing on broad trends in the marketplace and building long term brand equity in its products. Trademarks like the Pillsbury doughboy and the red Smucker’s picnic blanket remain widely recognized, but the firm is also pushing for growth, introducing 50 new products under a dozen brand names in 2006 alone. Recently, the firm has capitalized on the health and wellness trend and produced a variety of sugar-free, low-calorie, and organic products.

But the financial reality for Smucker is harsh, as its core products in baking and packaged foods sell at low margins and in slow growing industries. Most of Smucker’s products are placed in the center aisles of grocery stores, which are increasingly neglected as retailers push customers to the periphery of the store, towards fresh and prepared products. Smucker hopes to protect itself against falling sales in its core products, by branching out into new sectors like natural and organic foods, beverages, and international sales to try to boost its revenue.^[1]

Business Overview

The J.M. Smucker Company earns revenue through sales of its food products to distributors in the United States (and a few overseas). Over the last three years, the US retail market has comprised an increasing share of the company's revenue, most recently over 70%.^[2]. In terms of product categories, the biggest contributors to Smucker's net sales in fiscal year 2007 (ending April 30) were peanut butter, shortening and oils, fruit spreads, flour and baking products, and baking mixes. Together they comprised about 61% of net sales.^[3].

Business Financials

Smucker's 2007 revenue was $2.1 billion, which was down 0.3% from the previous year's revenue. ^[4] This decline was mainly due to a decline in foreign revenue. Its special markets revenue was $601 million, down 10% from the previous year. By contrast, its revenue from the US retail market increased by 4.2% to $1.5 billion.^[5]

Smucker's attributes U.S. revenue growth to volume increases in Jif and Smucker's brands and price increases on most brands. The sales of Jif were aided significantly by a product recall of rival ConAgra’s Peter Pan peanut butter in February 2007. The decrease in special markets revenue was primarily due to its September 2006 sale of its Canadian non-branded grain-based food services and industrial business.^[6] In fact, when the divested businesses are excluded, special markets revenue actually increased by 9%.^[7] Actual composition of its revenues, in terms of products, has barely changed over the last three years.^[8]

Operating income increased by 12% to $257 million in 2007, with operating margin increasing to 12.0% from 10.6% the previous year.^[9] Smucker's attributes this increase to a rise in gross profit and a decrease in merger and integration costs. Despite high commodity prices, the company was able to increase gross profit by selling off its Canadian non-branded businesses in late 2006.^[10]

Folgers Acquisition

On June 4, Smucker's bought Proctor & Gamble's Folgers coffee unit for $2.95 billion. As part of the deal, P&G shareholders will receive a 53.5 percent stake in Smuckers. Smuckers will assume $350 million of Folger's debt.

The acquisition will almost double the Smucker's market cap and make the company the leader in the coffee market. The Folger's brand takes in over $1 billion in sales annually, half of Smucker's total revenue. Smucker's has announced that the acquisition will add 9 percent to its earnings per share in 2009.

Trends and Forces

• Smucker's must continue to respond to changes in consumer demand: Smucker's relies on its widely recognized brand names to compete with other firms for consumer food dollars. As a result, Smucker's must pay close attention to trends in consumer preferences, such as convenience, health concerns, and dietary trends. Smucker's acknowledges that continuing to develop new products is vital for maintaining and growing market share, asserting that the strong and growing market share of many of its brands is a sign of its mastery of this force.^[13] Problems like food contamination, product recall, and consumer product liability claims might all impact consumer demand as well. A liability claim, especially one that is ruled against Smucker's, can also cause a loss in consumer confidence of its brands, negatively impacting its brand equity.^[14] If a product is really contaminated, then Smucker's might have to recall an entire line, hurting inventory, sales, and its reputation, as ConAgra found last year in the Peter Pan debacle. In the short term, demand for Jif is bound to decrease as ConAgra brings Peter Pan back to market and restores consumer confidence in its products.

• Rising commodities prices can hurt Smucker's operating margin.: Smucker's uses many raw materials to manufacture its products including corn, sugar, fruit, wheat, and peanuts. The manufacture, packaging, and transportation of its products requires fuels like natural gas and oil. As a result, Smucker's earnings are greatly affected by fluctuations in oil prices, wheat prices, and corn prices, among many other commodities. Recent rising prices in these commodities will increase costs for Smucker's, and competition it faces with other manufacturers may prevent the company from passing these costs onto consumers. Although Smucker's uses forward and futures contracts to hedge against price increases, it acknowledges that even these may not be enough to fully offset higher costs the company faces when commodity prices are more volatile.^[15]

• A potential recession and/or decline in consumer spending in the U.S. might cut SJM's revenues.: Smucker's depends heavily on sales to retailers in the U.S. As of April 30, 2007 sales to Wal-Mart alone accounted for about 20% of Smucker's net sales. The company's top 10 customers together accounted for over 50% of net sales. If these top retailers are hurt by recent market forces pushing consumer spending down (i.e. the credit crunch resulting from subprime lending or if consumers turn away from retail stores in favor of online shopping, Smucker's revenues will fall alongside those of its distributors. A potential disruption to one of its main customers - a lawsuit, takeover, bankruptcy, or even a merger - could seriously impact Smucker's sales numbers.^[16]

• Shifting trends in the retail grocery business don't work to Smucker's advantage. Growth in consumer interest in natural and organic products has had a significant impact on the food industry, and grocery stores continue to increase their inventory of these products. While Smucker's has recognized this trend and acquired/released new brands to compete in this sector, if natural and organic products begin to take up more of consumer's limited food budgets, then Smucker's core brands will suffer. Grocery stores have also moved in recent years towards an emphasis on fresh and prepared foods, building sandwich and soup stands and preparing meals for same-day consumption. To make these new ventures profitable, stores are steering customers toward the periphery of the store where they can find prepared products - and away from the center aisles, where most of Smucker's brands can be found.

Competition

Smucker's competes for retail shelf space with other food product producers, both branded and private label. There is no one company that competes with Smucker's in all the food products that it sells. Smucker's brand Jif is a leader in the peanut butter category, as is Crisco in oils and food shortening. Smucker's is confident in its ability to be a strong competitor because of its brand, high quality, varied offerings, innovations, and distribution network.^[17] Other companies that compete with the JM Smucker Company in multi-market categories include Conagra, Kraft Foods, Inc, General Mills, Inc., and Unilever. The table below compares a few metrics of these companies.

Another potential source of competition for Smucker's is private labels . These are private brands owned and used by retailers, such as Wal-Mart. A rise in private labels will hurt Smucker's business in the U.S.; Smucker's would be competing with not only companies like ConAgra, but the very retailers it sells its products to. Additionally, the natural foods boom has flooded the market with new small businesses and their organic products. As Smucker's tries to gain a foothold in this market, it must compete with these smaller labels. Smucker's also must deal with the increasing market share of Whole Foods Market and Trader Joe's, companies which focus on natural and organic products and which aim to draw more customers away from conventional grocery stores.

References

1. ↑ SJM 2007 10-k, page 2
2. ↑ SJM 2007 Annual Report, page 12
3. ↑ 2007 Annual Report, page 45
4. ↑ 2007 Annual Report, page 12
5. ↑ 2007 Annual Report, page 15
6. ↑ SJM 2007 10-k, page 2.
7. ↑ 2007 Annual Report, page 15-16.
8. ↑ 2007 Annual Report, page 45.
9. ↑ 2007 Annual Report, page 29.
10. ↑ 2007 Annual Report, page 17.
11. ↑ Data from 2007 Annual Report, page 29
12. ↑ Data from 2007 Annual Report, page 45
13. ↑ 2007 10-k, page 5
14. ↑ 2007 10-k, pages 5-6.
15. ↑ 2007 10-k, page 6.
16. ↑ 2007 10-k, page 7.
17. ↑ 2007 10-k, page 4
18. ↑ Source: 10-k reports
19. ↑ This is not a comprehensive list of the company's brands, but only a small sample of them.