More Bad News for Smucker

Our $135 fair value estimate for narrow-moat

In fiscal 2018, Smucker saw $7.36 billion in sales against a 19.5% adjusted operating margin, behind our $7.39 billion and 19.8% targets. Management calls for $8.3 billion in sales and adjusted EPS of $8.40 to $8.65 in fiscal 2019, versus our $8.3 billion and $9.29 marks. While our fiscal 2019 EPS mark will fall to reflect the firm's higher tax rate assumption (24.5% versus the earlier 23%), increased freight, product launch, and trade spending should also weigh on our estimate.

The slow sales were broad-based, as each major segment disappointed (coffee down 0.8%, consumer foods down 4.1%, pet foods up 1.6%, versus our respective calls for 0.5% growth, a 4.0% dip, and 2.0% expansion). Coffee was most responsible for the poor profitability, posting a 29.4% segment margin behind our 30.5% target. We had expected lower green coffee costs and a revised K-Cup agreement to drive results; however, trade spending behind the challenged Folgers label offset. The coffee unit is emblematic of Smucker's entire portfolio, with on-trend brands (such as Dunkin' Donuts in coffee, Nature's Recipe in pet, and Jif in consumer foods) offset by struggling mainstream labels (such as Folgers, 9Lives, and Crisco). Still, while the legacy labels are, in our view, seeing their competitive edge dull, we contend that Smucker's portfolio of leading brands remains relevant, contributing to our narrow moat rating.

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