No-Moat Smucker’s Q3 Lacks Flavor

We don’t expect a material change to our $139 fair value estimate for Smucker SJM after digesting mixed third-quarter results, leaving shares a bit overvalued. Organic sales popped 11%, as a 15% benefit from pricing was partially offset by a 4% drawdown from volume and unfavorable mix. Management attributed this to a pullback in its premium coffee arm, as consumers seem to be selectively ratcheting back their spending by trading down to lower-priced fare. However, Smucker’s Uncrustables line (which caters to value-seeking consumers) remains a hero in its mix, with sales up 38% in the recent three-month period, on its way to $650 million in sales this year.

Despite efforts to flex up pricing, Smucker’s adjusted gross and operating margins slipped 120 and 230 basis points, respectively, to 33.4% and 16.1%—a byproduct of stepped-up commodity, ingredient, manufacturing, and packaging costs, compounded by pressures from ongoing supply chain angst. While these headwinds aren’t unique to Smucker, we think its ability to weather the current challenges could be impeded by its lack of pricing power and entrenched retail relationships (which underpin our no-moat rating).

Going forward, we think Smucker is working to beef up its growth prospects, after announcing its decision to sell several lackluster pet food brands and its private-label pet fare to Post (brands that had accounted for 20% of total sales but just a mid-single-digit percentage of profits). This transaction not only affords the ability to focus its resources on higher value stock-keeping units, but with the retention of the Milk-Bone (pet snacks) and Meow Mix (cat food) brands, it should still benefit from the rampant pet adoption that occurred during the pandemic. However, we’re not convinced this will jolt its prospects. Further, we’re concerned by its increased financial firepower and appetite for a deal when juxtaposed with management’s tainted track record (as evidenced by our Poor capital allocation rating).