Smucker’s better-than-expected Q2 underscores winning combo of higher prices, innovation, marketing
“We delivered second quarter results that exceeded our expectations” with net sales excluding those from divestitures and foreign exchanging growing 8% in the second quarter and organic net sales growing 6% on a two-year compound annual growth rate, he told investors Nov. 23 during the company’s second quarter earnings call.
He explained that the gains were due in part to successfully implemented net pricing actions across the business paired with “lower than anticipated elasticity” and strong demand for the company’s brands due to “improved commercial execution and innovative marketing.”
As a result, he said, Smucker is increasing its earnings per share 2% with the full-year range now expected to be $8.35 to $8.75, and it is increasing its net sales outlook for fiscal 2022 to be flat at the midpoint of its range, which reflects 4.5% comparable growth.
Despite better-than-expected sales with revenues of $2.05bn – roughly 4.7% above consensus expectations – the company’s adjusted gross profit fell 7%, suggesting additional measures likely will be necessary to drive additional growth and offset higher costs going forward.
Among these measures could be additional rounds of pricing – especially in coffee, which will likely be reflected in Q4 increases, Smucker warned. He noted that rising inflation is adding about $550m to the company’s total basket of cost.
While Smucker told investors that inflation likely will continue to rise in the remainder of the fiscal year, he expects it to slow and he reassured them that the company is “able to get our arms around the balance of this fiscal year based on what we see to date.”
However, he stopped short of commenting on next year, noting while “we continue to successfully execute and manage through this overall environment … I think looking much beyond our current fiscal year is probably not prudent at this time.”
‘Meaningful innovation’ helps drive volume sales even as prices increase
While Smucker has leaned heavily on pricing to offset inflation, it is not the company’s only lever for offsetting higher costs of goods and driving sales, Smucker noted, explaining that the company also is relying on “meaningful innovation” to drive additional growth.
For example, he noted that the company’s fast-growing Uncrustables brand has significant runway in terms of increasing household penetration, which is currently at about only 11%, but which will be easier to serve as new manufacturing facilities come online.
Smucker also called out the potential for innovation in the company’s core peanut butter and jelly offerings in the US, the convenience channel and in Canada, and within coffee he sees more potential for K-cups.
Reflecting on the company’s approach to innovation, Smucker acknowledged that the business has stumbled a few times in the recent past, but it has learned from its mistakes and is shifting its strategy.
“We had been focused a few years ago on fewer, bigger [innovations], and I think we did have a couple of stumbles there, such as with the 1850 [coffee] brand, which notably is still in the market and is steady,” but it was a relatively big extension of Folgers and didn’t deliver the full desired impact, he said.
“What we’ve learned through that process is that you have to have a combination of smaller and larger bets, and if you get the mix right it works,” he added. So, by blending its innovation pipeline to include more diversity, Smucker has delivered against its growth algorithm in new products, despite a few launches that fell short.
An evolving marketing strategy
Smucker also continues to invest in its brands through promotions and marketing – a move that is helping it gain market share and volume even as prices rise.
Currently, the company is splitting its focus on media spend between mass and digital media roughly 60-40 to 50-50 depending on the category.
“Mass is important because it is all about reach. It’s about reaching as many consumers as you can. Digital is more about targeted. So, you already have consumers and you’re trying to make sure you keep them in your brand franchises. That’s an oversimplification, but that’s sort of how we think about it. So, you have to have both,” Smucker said.
More broadly, he added, the company recently consolidated its external marketing partners to one on the consumer marketing side, which allowed it to better align its goals and give that partner the license “to create bold and consumer relevant creative.”
For example, he pointed to JIF’s successful partnership with rapper Ludacris, who in a spot that dropped this summer raps with a mouth full of JIF peanut butter as part of the Lil Jif Project.
“There was a TikTok rap challenge as part of that in which we actually earned 7 billion views, which is unbelievable and certainly a record for us as a company in terms of the number of impressions we made,” Smucker said.
He added that the company’s more refined marketing strategy combined with its more focused sales execution model is a “very powerful” combination that is helping to fuel and promising outlook for the future.