ORRVILLE, OHIO — The J.M. Smucker Co. is redefining its US Retail Pet Foods segment to reflect an optimized portfolio focused around two brands: Meow Mix and Milk-Bone. The company detailed this strategy and its pet segment performance Feb. 28 in its fiscal 2023 third-quarter earnings report for the three-month period ended Jan. 31.
"Our third quarter results reflect the strong underlying momentum of our business, supported by robust demand for our leading brands and the continued focus on executing with excellence," said Mark Smucker, chair of the board, president and chief executive officer.
He noted the company will continue looking for opportunities to improve its “organizational agility,” product mix and profitability with a focus on strategic priorities.
“This includes our continuous work to optimize our portfolio, as reflected in the recently announced divestiture of several pet food brands, which will allow us to focus on those areas of the business with the greatest growth potential,” Mark Smucker said.
Sales for The J.M. Smucker Co.’s US Retail Pet Foods segment totaled $758.6 million in the third quarter, up 9% or $62 million year-over-year. Segment profit was reported at $109 million, representing a 14% improvement from the third quarter of fiscal 2022, and the segment’s profit margin grew 70 basis points to 14.4% in the third quarter of fiscal 2023.
“Net sales increased 10%, excluding noncomparable net sales in the prior year related to the private label dry pet food divestiture,” said Tucker Marshall, chief financial officer. “The net sales increase was led by growth across all segments, including dog food, cat food and dog snacks. Higher net pricing actions across the portfolio contributed a 16% increase to net sales, partially offset by a decreased contribution from volume/mix of 5%, primarily driven by cat food and dog snacks.”
The company attributed segment profit improvement to favorable impacts from net price realization and commodity, ingredient, manufacturing and packaging costs, which were partially offset by increased marketing spend and reduced volume/mix contributions.
“Our strong top-line growth was led by our Coffee and Pet businesses, along with robust growth for the Uncrustables® brand,” Mark Smucker said in the company’s third-quarter earnings call. “These platforms continue to be key enablers for sustained growth and reflect the strong execution of our strategy of leading in the attractive categories of pet, coffee and snacking.”
In its presentation at the 2023 Consumer Analyst Group of New York (CAGNY) Conference on Feb. 22, The J.M. Smucker Co. Smucker shared the company’s two-fold strategy in the pet food space: prioritizing and accelerating its growth in dog snacks and cat food, and improving profit margin.
The company has been refining its pet food and treat offerings since 2021, when it sold the Natural Balance premium pet food brand to Nexus Capital Management for approximately $50 million. The company went on to divest its private label dry dog food business, selling manufacturing assets of the business to Diamond Pet Foods, Inc. for roughly $33 million in December 2021.
Most recently in February 2023, the company sold several pet food brands and manufacturing assets to Post Holdings, Inc., for around $1.2 billion. This included the Rachael Ray Nutrish, Nature’s Recipe, 9Lives, Kibbles ‘n Bits and Gravy Train brands, which generated combined sales of $1.5 billion in the year ended April 30, 2022, according to The J.M. Smucker Co.
The divestiture does not include The J.M. Smucker Co.’s Meow Mix brand, which has driven strong growth over 19 of the last 20 consecutive quarters and is No. 1 in the dry cat food market, or the Milk-Bone brand, which The J.M. Smucker Co. hopes will lead its pet snacks business to $1 billion in sales and beyond.
“We do not expect the anticipated pet divestiture to have a material impact on our fiscal year 2023 full-year net sales and adjusted earnings per share results, as the transaction is anticipated to close late in the fourth quarter of the current fiscal year,” Marshall said.
In the third quarter of fiscal 2023, the Milk-Bone brand drove an 11% increase in net sales for the US Retail Pet Foods segment, according to Mark Smucker.
“The Milk-Bone® brand continues to drive growth for our market-leading business, and the dog snacks category overall, through core offerings and premium positioned innovation,” he said. “Milk-Bone® continued to significantly outpace the category in the quarter, with consumer take-away up 18%.”
The Meow Mix brand boosted net sales by 6% over the quarter, reflecting year-over-year sales growth for the brand throughout 20 of the last 21 quarters, Mark Smucker noted. However, supply chain disruptions continue to impact the dry cat food business.
“Demand exceeded our ability to fulfill shipments in the quarter and we anticipate improved customer in-stocks in the fourth quarter,” he said. “We continue to anticipate double-digit net sales growth for Meow Mix® this fiscal year, including continued growth in the fourth quarter.
“Our wet food supply chain continues to improve, and we will unlock further growth for the Meow Mix® brand in wet food,” Mark Smucker added. “Recently, we launched “wet 2.0”, and will support this initiative through a far-reaching campaign across TV, digital, social, influencer and e-commerce. Meow Mix® has been the leader in household penetration and volume share in the dry cat food category over the past year, and we will leverage our brand equity in dry food to drive growth in wet food.”
In the dog food category, Nutrish contributed a 20% gain to net sales growth. Mark Smucker noted the brand continues to benefit from category shifts, assortment optimization and marketing efforts. The Nutrish brand has since been acquired by Post Holdings.
“With the anticipated divestiture of several pet food brands, our business will shift from approximately two-thirds pet food and one-third pet snacks, to approximately 60% pet snacks and 40% cat food, which significantly improves the profit margin and product mix of the business,” he said. “The brands we are divesting account for approximately 20% of total company net sales, but only a mid-single digit percentage of total company profit. We are well-positioned to allocate resources and increase investments into the fast-growing and high-margin dog snacks category, where we have brands and offerings ranging from value to premium.”
For the third quarter overall, The J.M. Smucker Co. reported company-wide net sales of $2.22 billion, up 8% or $159.2 million year-over-year. Excluding divestitures and foreign currency exchange impacts, net sales increased 11% year-over-year.
The company also provided an update to its fiscal 2023 guidance, reflecting an expected net sales increase of 6% and an adjusted earnings per share (EPS) range between $8.55 and $8.75. Projections for free cash flow and capital expenditures for the year remain at $550 million each.
“Ongoing cost inflation, volatility in supply chains and the overall macroeconomic environment continue to impact financial results and cause uncertainty and risk for the fiscal year 2023 outlook,” Marshall said. “…We continue to focus on managing the elements we can control, including taking the necessary steps to minimize the impact of cost inflation, the product recall, and any potential business disruption.”
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