JM Smucker

J.M. Smucker's sales grew 5% in its fiscal first quarter. Adjusted gross margins expanded 760 basis points to 42.8%, though 520 basis points came from tariff refunds. Coffee sales and segment profit (36% of sales) benefited from last year's price increases, easing input costs, and the refunds.

Why it matters: Last year's headwinds from tariffs and green coffee cost inflation eased more quickly than we expected. The coffee segment performed well, but Café Bustelo was the highlight with 23% sales growth driven by distribution expansion, innovation, and popularity with younger consumers. Management raised its full-year outlook for net sales to fall 1%-2% (from a decline of 3%-4%) and adjusted earnings per share to $10.50-$11.00 (from $9.75-$10.25). The sales outlook reflects strong performance in coffee and Uncrustables (up 12%), while the EPS increase is driven by tariff refunds. While Smucker plans to continue to pass on lower green coffee prices to consumers, we think its decision to do so through promotions rather than cutting list prices is prudent given commodity price volatility. This should protect margins given the lag in permanent pricing actions.

The bottom line: We expect to raise our $120 fair value estimate for no-moat J.M. Smucker by a mid- to high-single-digit percentage, reflecting the tariff benefit and improved coffee performance. With shares up midsingle digits on the results, the stock looks fairly valued to us. For packaged-food exposure, we see attractive risk-adjusted upside in wide-moat PepsiCo. We think the market's worries about its snack business overlook its dominant brands and ability to reinvigorate organic volume growth through innovation and affordability adjustments.

Key stats: Leverage improved to 2.9 times net debt/EBITDA, achieving the company's full-year 3 times target quickly. Much of this came from the tariff refunds in the form of higher EBITDA, but also from the paydown of $230 million of debt.

After reviewing Smucker's fiscal fourth-quarter (April-end) earnings, we've increased our fair value estimate to $120 per share from $113, due to the time value of money and deflation in green coffee prices.

Smucker's fiscal fourth-quarter comparable sales grew 6% to $2.3 billion. Adjusted gross profit margin decreased 70 basis points to 36.8% on higher costs and unfavorable volume mix, but adjusted earnings per share rose 20% to $2.77 on lower marketing and distribution expenses. Green coffee price hikes benefited fiscal 2026 sales growth, but inflation compressed margins. This dynamic is expected to reverse in 2027 with commodity deflation, where lower costs help margins but decrease retail prices, reinforcing our view of a lack of durable pricing power.

Our fair value estimate implies 12.4 times adjusted price/earnings and 10.2 times enterprise value/adjusted EBITDA off our fiscal 2027 estimates.

For fiscal 2027, we forecast sales to decline 5.4%, worse than management's guidance for a 3%-4% drop. Much of the decline stems from green coffee deflation passed onto customers through lower prices. After 2027, we forecast revenue growth of about 1% per year from fiscal 2028 to fiscal 2031, mostly through volume growth.

For frozen handheld and spreads, we forecast average annual volume growth of 0.1% per year, reflecting slowing growth from Uncrustables and declining volume in spreads. We expect flat volume for coffee, as we think growth from Cafe Bustelo will offset declines from Folger’s, which will continue to lose favor with consumers. For pet, we forecast volume to grow about 1% per year as its brands target very competitive segments of the market. For sweet baked snacks, we forecast volumes to decline about nearly 3% per year. Much of the decline occurs in the near term as the company rationalizes its current offering. We forecast nearly 2% annual volume growth over the next five years for the away from home segment, mostly from expanded distribution of Uncrustables.

We forecast frozen handheld and spreads price/mix to decline 0.9% over the next five years, mostly from unfavorable mix from spreads. For coffee, we forecast prices to decline 1.2% annually on average over the next five years, as the firm lowers prices as it passes through green coffee cost deflation. For pet, sweet baked snacks, and away from home, we forecast roughly flat price/mix growth, reflecting a lack of pricing power.

At midcycle, we forecast adjusted operating margin to reach roughly 17.5%, a 280-basis-point improvement from fiscal 2026 as the company focuses on profitability over topline growth.

Historically, selling, general, and administrative expenses have been between 16%-19% of sales, and we forecast they will average around 18%. Included within this is about 6% of sales for R&D and marketing, including stepped-up advertising spending for the snacks segment. This is about 100 to 200 basis points more than other food producers, which we’d argue reflects the dissynergies across Smucker’s categories. Years of high spending on research and advertising and meager economic returns suggest structural challenges to forming a brand intangible that may not easily be solved.

We incorporate one ESG risk based on the social effect of its products within our forecast. We think changes in consumer health-related preferences are more than likely, especially in the US where Smucker generates most of its revenue. However, we expect a more muted effect on Smucker’s main products like coffee and peanut butter, leading to low materiality.

We assign Smucker an economic moat rating of none. For food producers, brand intangible assets and cost advantage are the typical sources of a durable competitive advantage. Although Smucker has a handful of leading brands, we observe a lack of pricing power or dominant positions within retailer shelves across enough of its portfolio. We also see no evidence of a cost advantage, as gross margin lags peers that boast that moat source. Lastly, 10-year returns on invested capital including goodwill have averaged 6.9%, roughly in line with our estimated cost of capital of 6.7% and serving as quantitative evidence for the lack of a moat. We forecast these returns to improve steadily by about 130 basis points over our forecast period from fiscal 2026 but do not see enough cushion of excess return to warrant a moat.

Brand intangibles are most often observed in pricing power, dominant market share, and/or entrenched relationships with retailers/restaurants. We’ve looked at each of Smucker’s segments to assess the potential of a brand intangible.

Coffee is Smucker’s largest segment by sales, and we don’t see evidence of brand intangible assets. Major brands are Folgers (number two market share), Dunkin’ (number five through a licensing agreement for home products with Inspire Brands), and Café Bustelo (number 12). Together, these brands hold about 13% of the market, according to Euromonitor, which isn’t dominant enough to signal a brand intangible to us. Additionally, based on channel checks, we note that while Dunkin’s lineup reflects premium pricing not far from market leader Starbucks, pricing for Folgers and Café Bustelo is much lower. But Folgers’ market share is nearly 3 times Dunkin’s, diluting the benefits of its premium price positioning. Additionally, Smucker pays royalties to use the Dunkin’ brand (contracted through 2039), so some of that pricing premium ends up in the licensor’s pockets.

Smucker’s second-largest segment by sales is retail frozen handheld and spreads, primarily consisting of peanut butter, fruit spreads, and frozen handhelds, among others. Its brands in consumer foods hold more weight, with Jif and Smucker’s commanding dominant leadership in nut and seed spreads and jams and preserves, respectively, but this hasn’t proved sufficient to evidence an edge even as our channel checks estimate premiums of roughly 10% to 20% over other brands and private label. In this context, these markets combined are less than a quarter that of coffee and fail to boast much in the way of growth, diminishing their importance to retailers. The company has extended this leadership into the $21 billion frozen ready meals market (according to Euromonitor) to unlock more growth with Uncrustables sandwiches. But in this more competitive market, we think it will need to innovate even more to capture market share gains and keep pace with peers.

Pet food has been historically the largest segment by sales but now is one of its smallest following the 2023 divestment of much of the business to Post (unwinding its earlier acquisitions of Big Heart and Ainsworth). Smucker kept some leading brands like Meow Mix (number four in cat food) and Milk-Bone (number one in dog treats), but despite the large size ($28 billion in annual sales), these markets tend to be fragmented with significant competition. Moreover, Smucker’s focus on the economy segment has exposed it to the slowest growing part of the market, with virtually no presence in the fast-growing premium segment. For example, over the last 10 years, the premium wet cat food market has grown 9% per year, outpacing the 5% of the economy segment where Meow Mix competes. On top of that, Smucker’s brands have been losing share within their market segments. Further, our channel checks observe little in terms of pricing power. Combined with our views on market share, we don’t see a brand intangible asset in its pet food segment.

We’d argue that part of the reason that the acquisitions of Big Heart and Ainsworth failed to justify the prices Smucker paid was that they increased exposure to the economy and mid-priced segments, respectively. Even as pet adoption soared during the pandemic, Smucker failed to leverage its position to unlock dominance in those areas of the market (with innovation and marketing that missed the mark) or enter the premium enclave, resulting in disappointing growth and ultimately a divestment of several brands at much lower valuation than it originally paid.

Additionally, we’d note that the lack of brand intangible is not from paltry investment levels. The company spends about 6%-7% of sales on R&D and marketing. This is about 100 to 150 basis points more than other food producers, which we’d argue reflects the inefficiencies in Smucker’s investments, potentially due to an inability to effectively incorporate consumer insights into its research, development, and marketing, which has been exacerbated by the lack of synergies across its businesses. Years of high spending on research and advertising and meager economic returns suggests structural challenges to forming a brand intangible that may not easily be solved.

We also don’t see any evidence of a cost advantage, although admittedly a comparative analysis is difficult due to differences in product mix. Historically, Smucker has generated adjusted gross margins in the high-30% range. But input cost inflation has caused margins to dip into the low-30% range in fiscal 2022, 2023, and 2026. We forecast margins to recover to the high-30% range. In comparison, wide-moat Nestle, which competes with Smucker in pet food and coffee and has a cost advantage moat source, generates gross margins in the high-40% range.

Even after paring back its pet exposure, Smucker has retained ownership of its strongest pet brands, which could allow it to benefit from the continued trend of increased pet ownership and spending.

Smucker’s investment into Uncrustables’ capacity and innovation should allow it to leverage its success in frozen sandwiches with new flavors and offerings, further boosting growth.

Despite years of languishing market share, Smucker is in a position to revitalize Folgers with new product innovation and rebranding to drive more robust top-line growth.

Paying a full price for Hostess Brands has increased the difficulty for Smucker to create value from the acquisition while also significantly adding to its debt load.

Food is a competitive space, and given Smucker’s lack of brand power companywide, it’s always at risk of price competition.

Smucker’s disparate portfolio of coffee, peanut butter and jelly, and pet food creates little synergies together, forcing it to expend more resources just to keep up with competitors.