J.M. Smucker (NYSE:SJM) came off a sugar high and surprised themselves as well as investors. At least that’s what management wants you to believe after reading the conference call transcript. The stock sold off on Thursday following surprisingly poor results. Despite product price increases Smuckers crashed and burned on volume. Management claims their price elasticity models showed they should be OK. But the cold water in your face reality diverged. [Note to quants: review reliability of price elasticity model, something is wrong]
After reading the earnings release and the formal management comments, investors are no farther ahead in understanding “What Happened”. There was a lot of rhetoric about understanding the dynamics of the business. So investors and analysts delved in and this is what happened.
Smuckers walked into a buzz saw. The market saw them coming and lined up a big fat sucker punch. The boys are still laughing about it. Here is what happened in this food commodity driven organization disguised as a consumer food products marketing company. Remember market share is all important as volume in food commodities allows greater economies of scale.
Heading into the key Christmas season Smuckers increases their pricing. The decision was based on higher commodity prices and the hope that during Christmas consumers would spend more vicariously. Competitors saw it coming and “reduced inventory”. In this business they call it pantry loading.
Here is what Vincent C. Byrd – President and COO had to say about it in his formal remarks on the conference call. “…consumer pantry loading of peanut butter in advance of our price increase was greater than we had originally estimated…” He then went on to say that while they watch market activities they chose to not make irresponsible short-term decisions. Also many retailers chose to promote their private labels at the expense of Suckers brands.
Eric Katzman of Deutsche Bank even went so far on the conference call to ask management “why do you think the Company was so – I guess was clucked so flat-footed versus competition in the last couple of months?” This was the lead off question from the lead off analysts. Management probably knew it was coming.
The bottom line is Smuckers was caught in the headlights like a deer. The question becomes can they recover and what do they need to do so? The next quarterly earnings report will be critical. Any weakness will be the death knell for management which seems to be top-heavy with middle-aged men with the Smuckers surname.
Note to analysts: You have all failed miserably. You could easily walk through stores and compare product prices. If you understand the industry you can see the “tells”. Who was advising customers to sell? Who at least was whispering about potential problems? No one had the nose to figure this one out.
George Gutowski writes from a caveat emptor perspective.
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