ORRVILLE, Ohio — While key brands across all its businesses enjoyed sales growth in the most recent quarter, The J.M. Smucker Co. is guarded in its outlook for sales and operating earnings growth for the balance of the year.

Net income in the third quarter ended Jan. 31 was $831.3 million, equal to $7.32 per share on the common stock, up dramatically from $1.16 per share in the third quarter last year. Sales were $1,903.3 million, up 1.3% from $1,878.8 million in the same period last year.

Third-quarter results included a $715.3 million income tax benefit, versus a $63 million charge during the same period last year. Partly offsetting the impact of the tax gain on the financial statement were impairment charges of $176.9 million in the third quarter, versus $75.7 million in the third quarter of fiscal 2017.

The charge in the current year reflected a reduction in the value of goodwill and trademarks in the company’s Retail Pet Foods segment.

“The current year charge resulted from reduced growth expectations for the U.S. Retail Pet Foods segment,” the company said.

“We had a strong third quarter, with sales growth for key brands in every business and strong earnings per share growth fueled by the benefits of U.S. income tax reform and ongoing cost discipline,” said Mark T. Smucker, chief executive officer.  “These results reflect our commitment to delivering top- and bottom-line growth and supporting our portfolio of iconic and emerging brands. In addition, the benefits of income tax reform provide incremental fuel to invest in our growth initiatives and support our employees and communities as well as opportunities to increase cash returned to shareholders.”

During a Feb. 16 conference call with investment analysts, Mr. Smucker was upbeat about the company’s growth initiatives.

“Innovation, including recent product launches such as Dunkin’ Donuts Cold Brew coffee and Meow Mix Simple Servings cat food, contributed to sales growth in the quarter,” he said. “In total, products introduced in the past three years delivered 7% of third-quarter sales, net sales. We look forward to sharing more on our integration efforts next week, including the introduction of two new platforms that extend the reach of our iconic Folgers and Jif brands.

“E-commerce also remains a significant area of strategic focus as we continue to place emphasis on this opportunity across our brands and businesses. While still a small base, year-to-date e-commerce sales for our U.S. retail businesses were up 78%, with Pet Food brands up 71% and coffee sales in the channel more than doubling. These represent two of the fastest-growing categories in e-commerce as they’re well suited for a subscription model of repeat purchases. Although not all of these sales are incremental, we continue to earn our fair share as consumers shift to online purchases.”

Net income in the nine months ended Jan. 31 was $1,152.7 million, equal to $10.15 per share, up from $481.9 million, or $4.14 per share, over the same period in fiscal 2017. Sales were $5,575.8 million, down 0.6% from $5,608.5 million.

For the full year, Smucker raised its earnings outlook sharply thanks to the benefit of a lower effective tax rate resulting from the U.S. income tax reform. Cutting somewhat into the gains from the tax benefit will be anticipated freight cost increases and a $7.1 million charge in the third quarter in connection with what the company called “obsolete pet food inventory.” The company’s effective tax rate is forecast at 28% for fiscal 2018, down from 32.5% to 33% as the company’s previous guidance. Net sales for the year are projected to be flat to down slightly.

In its breakdown of operating results by business sector, Smucker said U.S. Retail Consumer Foods operating profits was $121.3 million in the third quarter, up 1.8% from the previous year quarter. Profit margin in the quarter was 23.7%, up 70 basis points. Sales were $511.6 million, down 1.1%.

Improved profitability was attributed to higher net pricing and operational efficiencies, partially offset by lower volume/mix.

“Segment net sales decreased $5.7 million,” Smucker said. “Volume/mix reduced net sales by three percentage points, primarily driven by the Crisco and Pillsbury brands, partially offset by gains for the Smucker’s brand.  Net price realization increased net sales by two percentage points.”

Mr. Smucker was enthusiastic about the performance and outlook for the company’s Uncrustables frozen sandwich business.

“Momentum for the Smucker's Uncrustables brand also remained strong, with company-wide sales up 23% in the third quarter and on pace for another year of double-digit sales growth,” he said on a Feb. 16 conference call with investment analysts. “In addition, construction of our new Uncrustables sandwiches facility in Longmont, Colo., is on track. When complete in fiscal 2020, we will have capacity to further accelerate growth as we expect to double net sales from the $250 million level we project for the current fiscal year.”

In U.S. Retail Coffee, operating profit was $182.1 million, up 6%. The segment profit margin was 33.1%, up 110 basis points. Sales were $550.5 million in the quarter, up $12.9 million, or 2.4%, from year third quarter last year.

“Favorable volume/mix contributed three percentage points (to sales), driven by Dunkin’ Donuts K-Cup pods and the Café Bustelo brand,” Smucker said. “The favorable volume/mix was slightly offset by lower net price realization for the Folgers brand. Segment profit increased $9.9 million primarily due to favorable volume/mix and lower input costs, partially offset by an increase in marketing expense.”

During the call, Mark R. Belgya, vice-chairman and chief financial officer, said Folgers net sales fell 1% during the quarter.

“(That represents) a sequential improvement from the 6% sales decline last quarter and the 12% decline in the first quarter,” he said. “Sales in the Dunkin’ Donuts brand increased 7% on strong K-cup performance. For Café Bustelo, net sales increased 24%, behind significant growth for both roasting ground and K-cup offerings.”

In International and Away From Home, segment operating profit was $52.6 million, up 16% from the third quarter last year. Segment profit margins ballooned 210 basis points to 18.8% in the quarter. Net sales were $279.3 million, up 2.3%.

Smucker attributed the sales gain to $5.8 million of favorable foreign currency exchange and higher volume/mix driven by the Jif and Smucker's brands.  

“Net price realization reduced net sales by one percentage point,” Smucker said. “Segment profit increased $7.1 million, reflecting the contribution from favorable volume/mix and foreign currency exchange, along with lower marketing expense. In addition, the prior year included a $1.9 million write-off associated with the disposal of assets.”  

During the call, Barry C. Dunaway, president of Pet Food and Pet Snacks, commented on a pet food recall announced a day earlier. The recall of several varieties of wet canned Gravy TrainKibble & Bits, Skippy and Ol' Roy brands resulted from the discovery of trace amounts of the euthanasia drug pentobarbital in its dog food.

“We just learned about this issue about a week ago when it was brought to our attention,” Mr. Dunaway said. “So we quickly began an investigation. We partnered with the F.D.A. (Food and Drug Administration) on that. Both independently concluded there were no pet health safety concerns. But out of an abundance of concern, we did implement a voluntary withdrawal of that product. So we’re working with our retailers to get that product out of the marketplace right now. From a cost standpoint, that’s not reflected in any of our numbers, yet we’re still trying to get our arms around what that cost will be. Clearly, as we investigate and work with the supplier who was involved in that situation, we would look to recover those cost.” 

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