This Manufacturer Gets Smacked by Inflation and Infection

Ohio-based food purveyor J.M. Smucker (NYS: SJM) posted a disappointing second quarter as its bottom line missed market expectations. Additionally, hurt by rising raw material costs, the company trimmed its full-year earnings outlook. Let's find out what happened.

Topping the top line
J.M. Smucker's net sales rose to $1.51 million, an 18% increase compared to the previous year. This was mainly aided by the sale of K-Cups, designed for Green Mountain Coffee Roasters' (NAS: GMCR) Keurig brewers. Acquisition of Rowland Coffee also added to Smucker's quarterly sales.

The company raised product prices in the wake of higher raw material costs. Though the price hike added to net sales, it also led to a 1% decline in its sales volumes. Smucker's biggest business -- the U.S. retail coffee market -- saw an impressive 29% growth in sales.

Rising costs and rising concerns
Despite a rise in sales, Smucker's profits fell. After adjusting for restructuring and merger costs, the company reported earnings per share of $1.29, still below the market expectation of $1.39 per share. Compared to last year, net income fell by 15% to $127 million. Higher costs of raw materials such as coffee, peanut butter, edible oils, and milk largely hurt J.M. Smucker's profitability. Commodity prices were up a staggering 30% during the quarter. This pulled down the company's gross margin to 33.8% from 39.6% last year.

Smucker believes this trend of increasing costs is here to stay. Peanut butter prices are expected to go up further in the future. Prices of green coffee declined recently, but Smucker is projecting they will go up once again in the next two quarters.

Infected quality
Rising prices is not the only thing Smucker needs to worry about. The company in mid-November recalled 3,000 jars of its peanut butter because of a possibility of salmonella contamination. We'll find out next quarter how much this incident has affected sales.

A silver lining
Looking forward, J.M. Smucker plans to buy a major portion of Sara Lee's (NYS: SLE) North American coffee and tea food service operation for $350 million. This deal is expected to add $100 million to the company's sales for the next financial year.

The Foolish bottom line
J.M. Smucker cut its full-year earnings outlook because of additional interest expenses and increasing raw material prices. Additionally, the company is facing quality concerns. However, the Sara Lee deal may brighten up Smucker's numbers in the future. Fools should watch the developments of this deal carefully. Add J.M. Smucker to your watchlist for our Foolish analysis for free. Click here.

At the time thisarticle was published Navjot Kaur does not own shares in the companies mentioned in this article. Motley Fool newsletter services have recommended buying shares of Green Mountain Coffee Roasters. Motley Fool newsletter services have recommended creating a lurking gator position in Green Mountain Coffee Roasters. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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