CAG ConAgra Brands Inc

The J.M. Smucker Company (SJM) delivered second-quarter 2012 adjusted earnings of $1.29 per share, lagging behind the Zacks Consensus Estimate of $1.39 and the prior-year quarter's earnings of $1.38 per share.

Adjusted earnings, excluding restructuring and merger and integration costs (‘project costs’), came in at 17 cents and 13 cents per share in the second quarter of 2012 and 2011, respectively.

However, the results in the quarter continues to include the operations of Rowland Coffee Roasters Inc. after the completion of the acquisition on May 16, 2011. The earnings in the second quarter were also benefited by the company’s buyback program, which resulted in a decline of the weighted-average shares outstanding.

Net sales in the quarter increased 18% year over year to $1.54 billion, due to net price realization of many of the company's brands. The Zacks Consensus Revenue Estimate was $1.49 billion. The positive growth in net sales was helped by favorable foreign exchange rates, combined with the acquisition impact of Rowland Coffee, which contributed approximately 2% to net sales.

Though the total sales mix impact was positive, volumes declined 1% in non-branded beverages, Crisco oils, Folgers coffee, and Pillsbury flour, offsetting the volume gains recognized in Pillsbury baking mixes and Jif peanut butter.

Expenses and Margin Performance

Excluding project costs, gross profits inched up 0.9% year over year to $511.4 million on the back of higher prices in the coffee category, which had also offset the higher commodity costs. However, margins still contracted 580 basis points (bps) to 33.8% in the second quarter of 2012.

Selling, distribution and administrative (‘SD&A’) expenses climbed 6% year over year. However, it declined 180 bps to 15.6% as a percentage of net sales. Selling and general and administrative expenses increased 17% and 10%, respectively, while distribution expenses inched down 1% in the quarter.  Marketing expenses were in tune with the second quarter of 2011.

The acquisition of the Rowland Coffee business partially impacted the increase in SD&A expenses, while the intangible assets associated with the acquisition led to a higher amortization expense in the second quarter of 2012.

Excluding the impact of the project costs, operating income decreased 8.0% while operating margin contracted 460 basis points to 16.0%.

Segment Performance

The company’s biggest segment, U.S. Retail Coffee Market, reported a robust 29% increase in sales to $617.5 million, aided by price increases since May 2010. Volume decreased 4% in the second quarter of 2012, excluding Rowland Coffee. The acquisition of Rowland Coffee contributed approximately $26.7 million to segment net sales.

The U.S. Retail Consumer Market segment’s sales soared 13% while volumes remained unchanged. Although the segment experienced higher raw material costs in flour, oils, milk, sweetener and peanuts, price increases were noticed in most of these categories.

Net sales in the International, Foodservice, and Natural Foods segment, excluding the impact of the Rowland Coffee acquisition, divestiture and foreign exchange, increased 6% over the same period, owing to price increases, which more than offset the unfavorable sales mix and volume declines.

Other Financial Updates

At the end of October 31, 2011, Smucker had cash and cash equivalents of $496.3 million compared with $487.5 million at the end of October 31, 2010.

Cash flow provided from operating activities was $118.2 million, compared with $46.8 million in the same period of 2010.

On October 25, 2011, Smucker’s board declared a dividend of 48 cents per share, payable on December 1, 2011 to shareholders of record on as of November 11, 2011.

Acquisition Update

In late-October 2011, Smucker decided to acquire a major portion of the North American foodservice coffee and tea operations of the packaged food company Sara Lee Corporation (SLE) for $350 million.

The deal is expected to close in early 2012 and 450 Sara Lee employees are expected to transfer to Ohio-based J.M. Smucker.

The acquisition is expected to add net sales of approximately $100 million to the company in fiscal 2012. However, it is not expected to have a material impact on earnings per share, excluding one-time costs of the transaction.

In addition, one-time costs are estimated to be approximately $25 million, out of which one-third are expected to be incurred in fiscal 2012, with the remainder in fiscal 2015.

Furthermore, on a full-year basis, the transaction is expected to generate EBITDA of approximately $70 million to $75 million, and earnings of about 10 cents per share, excluding one-time costs. Smucker expects an annual amortization expense of approximately $15 million to $20 million for the full-year.

Outlook

Concurrent with the earnings release, the company provided guidance for fiscal 2012. For fiscal 2012, the company continues to expect net price realization to result in a net sales percentage growth in the mid-teens, compared to 2011.

Furthermore, excluding project costs of 60 cents to 65 cents per share, Smucker expects its earnings to range from $4.90 to $5.00 for fiscal 2012. This outlook does not include the impact of the anticipated acquisition of Sara Lee's North American foodservice coffee and hot beverage business.

Currently, Smucker -- which faces stiff competition from ConAgra Foods Inc. (CAG) and Kraft Foods  Inc (KFT), has a Zacks #2 Rank, implying a short-term Buy recommendation.

 
CONAGRA FOODS (CAG): Free Stock Analysis Report
 
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SMUCKER JM (SJM): Free Stock Analysis Report
 
SARA LEE (SLE): Free Stock Analysis Report
 
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