Category: Expert Insights

. Collectively, pet food and coffee comprise nearly 70% of Smucker’s sales. Despite this benefit, we forecast just 2% annual sales growth for the firm (less than that of the total at-home feed and beverage industry), as Smucker’s high exposure to mainstream and value segments in pet food and coffee should result in continuing market share losses as consumers are trading up to premium offerings. Smucker is attempting to offset this pressure with products more aligned with consumer trends, such as Uncrustables on-the-go snacks, it will take a few years for these smaller brands to move the needle.

Financial Strength

The Big Heart Pet Brands acquisition in 2015 increased the net debt/adjusted EBITDA ratio to above 6 from 2. Smucker paid $5.9 billion for the business, 13 times EBITDA, which we believe was rich, particularly considering the acquired brands’ poor positioning in the category. We believe management was prudent in its decision to sell the nonstrategic canned milk business shortly thereafter for $194 million to free up capital in order to accelerate debt reduction. Share repurchases were also significantly curtailed in 2015, which we view as sensible. Net debt to adjusted EBITDA declined to a manageable 2.8 times by 2018, in our opinion, before the firm announced it was acquiring pet food producer. Smucker’s free cash flow (CFO less capital expenditures) as a percentage of revenue has averaged high single digits to low double digits historically, and we expect similar results going forward. With net debt/adjusted EBITDA below 3 times, the firm’s priorities for cash are dividends, capital expenditures, acquisitions, and share repurchase. In the past 10 years, Smucker has averaged a 50% dividend payout ratio (in line with peers), and we expect it will continue to do so; our forecast anticipates 2%-6% annual dividend increases.

Bulls Say

• A significant increase in R&D and marketing (and increasing productivity of those investments) should enhance Smucker’s capabilities, helping it capitalize on consumer trends.

• During the pandemic, consumers adopted 11 million pets and purchased 3 million coffee machines, which should provide a lasting benefit for categories representing nearly 70% of Smucker’s fiscal 2021 sales.

• Executive leadership changes (newly created chief operating officer role, leadership changes for the U.S. sales organization and the pet food segment) should improve execution and enhance accountability.

Company Profile

J.M. Smucker is a packaged food company that primarily operates in the U.S. retail channel (88% of fiscal 2021 revenue), but also in U.S. food-service (5%), and international (7%). Its largest category is pet food and treats (36% of 2021 revenue), with popular brands such as Milk-Bone, Meow Mix, 9Lives, Kibbles ‘n Bits, Nature’s Recipe, and Rachael Ray Nutrish. Its second-largest category is coffee (33%) with the number-two brand Folgers and number-six Dunkin’. Other large categories are peanut butter (10%), with number-one Jif, fruit spreads (5%) with number-one Smucker’s, and frozen hand-held foods (5%) with number-one Uncrustables.

(Source: Morningstar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

As a result, Federal Realty has been able to drive strong same-store net operating income growth and average double-digit re-leasing spreads over the past two decades.

Its portfolio should continue to attract shoppers and tenants and produce solid internal growth even in a challenging retail environment.

E-commerce continues to pressure brick-and-mortar retail as consumers increasingly move their shopping habits online. While many of Federal’s tenants must directly compete with the growth of e-commerce, much of the portfolio is insulated from online competition. Segments like grocery stores, restaurants, fitness centers, and other service-based businesses still drive traffic to physical retail centers. Regardless of the competition from e-commerce, location is still paramount for retailers. Retailers are becoming more selective with their physical locations, opting to locate storefronts in the highest-quality assets while closing stores in low-productivity sites. Thus, we expect Federal’s portfolio to remain in demand despite the changing retail environment.

However, Federal must deal with the fallout of the current corona virus pandemic. Many retailers were forced to close for a period of time and shopping at brick-and-mortar locations has fallen. While Federal’s revenue is somewhat protected by long-term leases, retailer bankruptcies have caused a drop in occupancy and Federal has been forced to offer rent concessions to keep others afloat. We believe that high-quality retail locations will rebound and will eventually return to their prior occupancy and rent levels, but the short-term impact to Federal’s cash flow has been significant.

Financial strength:

Federal is in good financial shape from a liquidity and a solvency perspective. The company seeks to maintain a solid but flexible balance sheet, which we believe will serve stakeholders well. Federal has an A-/A3 credit rating, so it should be able to easily access low-rated debt to service financial obligations. Debt maturities in the near term should be manageable through a combination of refinancing and the company’s significant free cash flow. Additionally, the company should be able to access the capital markets when development and redevelopment opportunities arise. We expect 2021 net debt/EBITDA and EBITDA/interest to be roughly 6.9 and 4.2 times, respectively, both of which are slightly outside of Federal’s targeted range but we believe the company will return to historical norms within a few years .As a REIT, Federal is required to pay out 90% of its income as dividends to shareholders, which limits its ability to retain its cash flow.

Company Profile:

Federal Realty Investment Trust is a shopping center-focused retail real estate investment trust that owns high-quality properties in eight of the largest metropolitan markets. Its portfolio includes an interest in 101 properties, which includes 23.4 million square feet of retail space and over 2,600 multifamily units. Federal’s retail portfolio includes grocery-anchored centers, superregional centers, power centers, and mixed-use urban centers. Federal Realty has focused on owning assets in highly desirable areas with significant growth, and as a result, the average population density and average median household income are higher for its portfolio than for any other retail REIT.

(Source: Morningstar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.