The J. M. Smucker Company (SJM Quick QuoteSJM - Free Report) posted first-quarter fiscal 2023 results, wherein the top and bottom lines beat the Zacks Consensus Estimate and the former increased year over year. Solid results reflect the continued consumer demand for the company’s brands, which drove organic sales at the company’s core focus areas – pet, snacking and coffee. These results came despite elevated costs, a volatile supply chain and the impacts of the Jif peanut butter product recall.

Incidentally, SJM recently initiated a voluntary recall of certain Jif peanut butter products made at its Lexington, KY facility and sold mainly in the United States. The move was a result of potential salmonella contamination.

In fiscal 2023, management remains focused on sustaining its solid momentum by investing in growth areas like Uncrustables, Milk-Bone and Dunkin' brands. Based on a better-than-expected first-quarter show and continued brand momentum, management pulled up its net sales, adjusted earnings per share (EPS) and free cash flow views for fiscal 2023.

Quarter in Detail

Adjusted earnings of $1.67 per share declined 12% year over year, mainly due to the impacts of the product recall. However, the metric surpassed the Zacks Consensus Estimate of $1.25.

Net sales amounted to $1,873 million, which beat the consensus mark of $1,848 million. The top line advanced 1% year over year. This included an adverse impact of 9% related to the Jif peanut butter product recall. Excluding non-comparable net sales related to divestitures and currency movements, net sales increased 4%. The uptick in comparable net sales can be attributed to the positive net price realization in most company segments. This was partly offset by a lower volume/mix and impacts related to the product recall.

The adjusted gross profit fell 9% to $587.4 million. The adjusted gross margin contracted from 34.8% to 31.4%, bearing some impacts of escalated costs, mainly stemming from higher commodity and ingredient, packaging and manufacturing costs. The adjusted operating income tumbled 17% to $270 million due to higher selling, distribution and administrative (SD&A) costs. The adjusted operating margin decreased 300 basis points to 14.4%.

Segment Performance

U.S. Retail Pet Foods: Segment sales jumped 13% to $729 million. Excluding non-comparable net sales associated with the private label dry pet food businesses divestiture, the metric rose 17%. The volume/mix had an adverse impact of 3%, made up by the net price realization, which had a favorable 20-percentage point impact on net sales. The segment’s profit jumped 51% to $120.3 million.

U.S. Retail Coffee: Net sales increased 10% to $597.9 million. The volume/mix had a 14-percentage point negative impact, and the net price realization boosted net sales by 24 percentage points. The segment’s profit moved down 4% to $145.9 million.

U.S. Retail Consumer Foods: Sales in the segment fell 29% to $311.1 million, which includes a 32% adverse impact of the abovementioned product recall. Excluding the impact of the natural beverage and grain businesses divestiture, net sales descended 23%. The net price realization had a 3-percentage point adverse impact on sales. The volume/mix reduced net sales by 20 percentage points. The segment’s profit slumped 54% to $54.8 million.

International and Away From Home: Net sales advanced 2% to $235 million, including an adverse impact of 10% related to the product recall. Excluding the impact of the natural beverage and grain businesses divestiture, as well as the negative impacts of currency movements, net sales escalated by 4%. Excluding the impact of divestitures and currency headwinds, net sales rose 15% for the Away from Home division, while it fell 6% for the International division, largely due to the product recall. The volume/mix remained neutral, and the net price realization had positive impacts of 4 percentage points on overall segment net sales. The segment’s profit plunged 50% to $16.6 million.

Financials

The J. M. Smucker exited the quarter with cash and cash equivalents of $151.6 million, long-term debt of $4,311.6 million and total shareholders’ equity of $8,144.3 million.

Cash flow used by operating activities amounted to $39 million for the three-month period ended Jul 31, 2022. Free cash flow was negative $127.3 million in the quarter. Net debt borrowings amounted to $207 million for the quarter.

Free cash flow and capital expenditures are likely to be $550 million each in fiscal 2023. Free cash flow was earlier expected to be $550 million.

Fiscal 2023 Guidance

Management stated that the ongoing cost inflation, a volatile supply chain and a broader macroeconomic landscape continue to affect the company’s results and cause risks for fiscal 2023. The recent product recall is expected to impact financial results. That said, The J.M. Smucker remains focused on actions like minimizing the impacts of cost inflation, product recall and other business disruptions. The company raised its net sales EPS guidance for fiscal 2023.

For fiscal 2023, SJM anticipates net sales to rise 4-5% now, up from the previous guidance of 3.5%-4.5%. Excluding non-comparable sales related to the private label dry pet food and natural beverage and grain businesses divestitures, net sales are anticipated to improve nearly 6.5% at the midpoint of the net sales guidance compared with the 6% expected before. The view reflects the positive impacts of elevated net pricing to counter cost inflation in many categories, partly negated by an expected volume/mix effect of the price elasticity of demand as well as a 2% adverse impact related to the product recall.

Adjusted EPS for fiscal 2023 is envisioned in the range of $8.20-$8.60, up from the earlier range of $7.85-$8.25. The updated guidance includes an 80-cent impact of the product recall. The bottom-line view reflects the positive impacts of pricing and share buybacks (of the prior year), more than negated by inflated costs, an expected volume/mix effect of the price elasticity of demand, an adverse impact of the product recall and elevated SD&A expenses.

The bottom-line view takes into account an adjusted gross profit margin of 33.5-34%. Also, the adjusted effective income tax rate is envisioned at 24.2%.

Shares of this Zacks Rank #3 (Hold) company have rallied 9.9% in the past three months compared with the industry’s growth of 6.4%.

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