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Smucker shares hit two-year low, as coffee squeeze hits profits

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Shares in JM Smucker tumbled to a two-year low after an attempt to pass on to customers higher coffee costs backfired, prompting a tumble in sector margins and forcing the group to caution on full-year earnings.

JM Smucker shares dropped 8.6% at one point, to $108.60, the lowest since August 2015, after the owner of brands such as Folgers, Dunkin' Donuts and Café Bustelo lowered to $7.75-7.95 per share, from $7.85-$8.05 per share, its forecast for underlining earnings in the year to the end of April 2018.

It blamed the downgrade on "lower-than-anticipated" results for the May-to-July quarter, and a cut to sales prices for the rest of the financial year, particularly for US retail coffee products.

Group sales for the full year "are expected to be down slightly compared to the prior year", JM Smucker said.

Prices raised, volumes fall

For the May-to-July period, group earnings dropped 25% to $126.8m, equivalent to $1.51 per share excluding one-off charges, short of the $1.64-per-share figure that Wall Street had expected.

The drop reflected in part a 3.7% fall, to $1.75bn, in sales, with both US retail coffee and consumer foods operations seeing declines.

While Smucker saw a 1% boost to sales from higher prices of its coffee products, the benefit was more than offset by a 5% drop in volumes, led by coffee and oils lines.

"Our first quarter results fell slightly short of our projections, primarily driven by lower-than-anticipated volume for Folgers roast and ground coffee," said Mark Smucker, the JM Smucker chief executive.

'Higher coffee costs'

Meanwhile, costs were swollen by elevated bean purchase prices, with the group blaming a 29% tumble to $123.8m in profits in US retail coffee on "the net unfavourable impact of higher commodity costs", besides the drop in revenues.

The division's headline margin tumbled by 8.2 percentage points to 25.7%.

In retail coffee, "the company anticipates the impact of higher costs to moderate throughout the remainder of the fiscal year", JM Smucker said, a decline which would echo the easing in market values.

New York arabica coffee futures have declined by 8.4% so far in 2017, on a nearest-but-one contract basis, to stand at 127.70 cents a pound on Thursday for the December lot.

'Trends are improving'

JM Smucker in January revealed coffee price rises averaging 6% for most of its coffee brands, "in response to sustained increases in green coffee costs".

The move came amid a rally which lifted futures close to 160 cents a pound that month, before a decline fuelled by factors such as strong Colombian and Honduran production, and data showing large coffee stocks in importing countries.

Mr Smucker added that the group had "taken actions to improve our competitive positioning for Folgers", cutting coffee prices in July.

"As a result, volume trends are improving."

Steve Oakland, who heads Smucker's coffee and US food and beverage businesses, told investors that the group's coffee prices had been "out of line.

"When we adjusted, the volume came back."

By Mike Verdin

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