The J.M. Smucker Company, known for Jif peanut butter, Folgers coffee, and Uncrustables sandwiches, recently reported robust growth in their Q3 2024 earnings call. However, a closer look at the transcript reveals a curious detail that could be a key driver of Smucker's success, especially in their ambitious Uncrustables expansion: a beneficial transition services agreement with the buyer of their divested pet food brands.

Smucker's strategy has been to focus on their fastest-growing categories: coffee, snacking, and pet foods. They've made strategic acquisitions like Hostess and divestitures like Sahale Snacks and their Canadian condiment businesses. This laser focus seems to be paying off, with Q3 2024 showing a 6% increase in comparable net sales and a double-digit surge in adjusted earnings per share.

The shining star is Uncrustables. Smucker's is aiming to make it a billion-dollar brand by the end of fiscal year 2026. They're investing heavily, with a third manufacturing site in McCalla, Alabama, set to begin production later this year. The call showcased impressive results: 6% total company net sales growth for Uncrustables, driven by over 30% growth in the Away From Home business. Consumer takeaway experienced double-digit increases, and January 2024 marked the second-highest month of dollar consumption for Uncrustables ever.

However, Smucker's also faces a $0.60 earnings per share headwind in FY '24 due to 'stranded overhead' from their pet food divestiture, primarily related to their distribution network. This is a common challenge companies encounter after divesting businesses.

Here's where the intriguing hypothesis arises. Smucker's mentions that the buyer of their pet food brands is reimbursing them for utilizing Smucker's existing infrastructure, specifically their distribution network. This reimbursement, along with income from the ongoing transition services agreement, significantly offsets the stranded overhead impact.

The Hypothesis: Free Rent for Uncrustables?

Could Smucker's be getting a fantastic deal on warehousing and distribution costs for Uncrustables by leveraging this reimbursement? As Uncrustables production increases, so does their need for storage space. By using their existing network and receiving reimbursement, Smucker's is essentially reducing the cost of expansion, freeing up resources to invest in production and marketing. This strategy becomes particularly potent when considering that the reimbursement payments end in FY '25, coinciding with the McCalla facility coming online, potentially requiring that freed-up space.

Potential Savings: Uncrustables Distribution Costs

While Smucker's hasn't specified the reimbursement amount, their FY '24 'stranded overhead' impact is projected at $0.60 per share. If even a portion of this is allocated to Uncrustables' distribution, the savings become substantial. A conservative 25% allocation to Uncrustables, with 104.4 million weighted average shares outstanding, translates to approximately $15.6 million in annual savings.

This analysis suggests a clever maneuver by Smucker's. They are not simply divesting non-core assets; they are strategically using the transition to fuel their growth engine—Uncrustables. This adds a layer of hidden financial efficiency, potentially enabling them to outpace competitors in the growing frozen sandwich market.

Smucker's has not explicitly confirmed this connection. Their upcoming fourth-quarter earnings call, with its detailed FY '25 outlook, may provide more insight into this strategic interplay. Until then, the question remains: Is Smucker's building a billion-dollar Uncrustables empire on the back of, well, free rent?

"Fun Fact: The average American eats about 3,000 peanut butter and jelly sandwiches in their lifetime. With the convenience and popularity of Uncrustables, Smucker's is well-positioned to capitalize on this love for PB&J!"