Hormel Foods Hurt by 60% Plunge in Turkey Meat Prices

Jennie-O Turkey Store earnings fell 25% during Q1 FY17

Premium meat products Company Hormel Foods Corp. (NYSE: HRL) announced its Q1 FY17 financial results on February 23rd, 2017.

The Austin, Minnesota-based Company produces a range of meat and food products and markets those products in the US and international markets. The Company operates through five segments: Grocery Products, Refrigerated Foods, Jennie-O Turkey Store (JOTS), Specialty Foods, and International & Other. Internationally, the Company markets its products through its subsidiary, Hormel Foods International Corporation (HFIC). The Company offers its products under perishable, poultry, shelf-stable and miscellaneous categories. Read more about Hormel Foods’ financial results below.

Q1 FY17 financial highlights

During Q1 FY17, Hormel Foods reported a sales decline of 1% to $2.28 billion from $2.29 billion in the year ago same period. The results reflected the divestitures of the Diamond Crystal Brands and Farmer John businesses and the acquisition of Justin’s L.L.C. During the reporting quarter, volumes fell 2% Y-o-Y on a GAAP basis. Excluding the impact of these transactions, sales increased 3% over the year ago comparable quarter, with adjusted volume up 5%.

During Q1 FY17, Hormel Foods’ cost of sales edged down marginally 0.4% to $1.72 billion. Gross margin contracted by 10 bps to 24.2%. Selling, general, and administrative expenses came in slightly higher at $210.1 million versus $209.9 million recorded in Q1 FY16. The Company’s operating margin was 15.6% compared to 15.7% in the prior year’s corresponding quarter. Net earnings of $235 million, or $0.44 per diluted share, was almost flat versus the year earlier same period.

During the reporting quarter, three of the Company’s five segments posted earnings growth. Refrigerated Foods, International and Grocery Products grew earnings, while Specialty Products earnings were flat and Jennie-O Turkey Store earnings fell 25%. Declining turkey prices, higher expenses and competition pressured the segment’s profitability, according to Jim Snee, President and CEO. Meanwhile, sales in the Jennie-O segment grew 13%, with volumes up 22% over the year ago comparable period.

Hormel Foods faced headwinds in the form of a 60% fall in turkey meat prices to seven-year lows, higher operating expenses primarily for biosecurity measures in its live production system and lower yields in its plant operations. Competing proteins continue to pressure Hormel’s business in addition to increased competitive pressure across all three sales divisions — food service, retail and deli.

Hormel Foods’ marginal sales decline reflects the general industry trend; market leader Tyson Foods Inc. (NYSE: TSN) reported that revenue remained almost flat at $9.18 billion during its latest quarterly results. Pilgrim’s Pride Corp. (NASDAQ: PPC), the second-largest chicken producer in the US, reported a 2.7% decline in revenue to $1.91 billion in its latest results.

Segmental highlights

During the reporting quarter, three of the Company’s five segments posted earnings growth. Refrigerated Foods, International and Grocery Products grew earnings, while Specialty Products earnings were flat and Jennie-O Turkey Store earnings fell 25%.

Refrigerated Foods: In this segment, profit jumped 4% solid value-added product growth in the foodservice and retail channels. Sales fell 3% to $1.12 billion, primarily due to the divestiture of the Farmer John business in January 2017. Foodservice products such as HORMEL pepperoni and HORMEL BACON1 fully cooked bacon, and retail products such as HORMEL GATHERINGS party trays and HORMEL NATURAL CHOICE meats had excellent sales growth during the quarter. Refrigerated Foods accounted for 49% of net sales, and 48% of total segment operating profit during the reporting quarter.

Jennie-O Turkey Store: In this segment, sales increased 13% to $421 million and volume increased 22% while segment profit plunged 25%. Despite volume and sales increases of value-added products, segment profit declined primarily due to lower turkey commodity prices and increased operating expenses. Pricing pressure from competing proteins in the foodservice, deli and retail channels also affected the quarterly results. Jennie-O Turkey Store accounted for 19% of net sales, and 19% of total segment operating profit during the reporting quarter.

International & Other: In this segment, profit grew 5% while sales fell 2% to $125.8 million, as high pork raw material costs and soft retail demand continue to weigh on the China meat business. International & Other accounted for 6% of net sales, and 7% of total segment operating profit during the reporting quarter.

Grocery Products: In this segment, sales jumped 7% to $417.7 million on the inclusion of JUSTIN’S specialty nut butters along with strong sales of WHOLLY GUACAMOLE dips, SKIPPY peanut butter products, and HERDEZ salsa. Segment profit grew 1%. Grocery Products stepped up advertising to support key brands such as WHOLLY GUACAMOLE dips and HERDEZ salsa during the quarter. Grocery Products accounted for 18% of net sales, and 18% of total segment operating profit during the reporting quarter.

Specialty Foods: In this segment, profit was flat and sales fell 19% to $192.6 million, primarily due to the divestiture of Diamond Crystal Brands in May 2016. MUSCLE MILK branded items posted double-digit sales growth with increases across many product lines including protein powders and ready-to-drink protein beverages. Specialty Foods accounted for 8% of net sales, and 8% of total segment operating profit during the reporting quarter.

Other highlights

Cash and cash equivalents: At the end of Q1 FY17, Hormel Foods had cash and cash equivalents of $609.8 million, up from $415.1 million as of October 30th, 2016. However, the Company’s long-term debt of $250 million (excluding current maturities) remained mostly unchanged. During the reporting quarter, Hormel Foods generated cash of $177.6 million from operating activities, plunging 36.3% Y-o-Y. Capital expenditure on purchase of property and plant totaled $34 million compared to $32.1 million a year ago.

Dividends: Effective FY17, the Board of Directors increased the annual dividend by 17% to $0.68 per share. The Company paid its 354th consecutive quarterly dividend at an annualized rate of $0.68, effective February 15th, 2017.

Sale of meat brand and farming operations: On November 21st, 2016, Hormel Foods announced that it has inked a definitive agreement with pork producer Smithfield Foods Inc. to sell its Saag’s and Farmer John meat brands and three farming operations located in Arizona, California, and Wyoming, against a cash payment of $145 million. The deal closed at the end of 2016. The sale proceeds would be eventually deployed to fortify the Company’s food products’ business in the near-term. Farmer John harvests approximately 7,400 hogs per day and in FY16, the businesses accounted for approximately $500 million in sales and EPS of approximately $0.03.

Management changes: On February 02nd, 2017, Hormel announced the upcoming retirement of Larry Lyons, senior vice president of human resources. The Company also announced the upcoming retirement of Bryan Farnsworth, senior vice president of supply chain. As a result, Mark Coffey, vice president of affiliated business units in Refrigerated Foods, will assume the role of vice president of supply chain, and Mark Morey, former president of the Company’s previous Farmer John (Vernon, California) business, will assume the role of vice president of affiliated business units in Refrigerated Foods.

New product launch: On January 10th, 2017, Jennie-O Turkey Store launched a new sausage for consumers seeking simple and natural ingredients. The Company’s All-Natural Turkey Sausage is a lean alternative to traditional pork sausage and is available in hot and original varieties with lower fat content and a simple ingredient list: salt, sugar, a blend of spices and rosemary extract. The All-Natural Turkey sausage formulation offers additional benefits such as improved flavor, reduced sodium and 110 calories and 6 grams of fat per serving. The product also is minimally processed and free of preservatives.

Guidance for FY17

Hormel Foods anticipates a growth in revenue in FY17 on the back of higher demand for its food services as well as retailing products. In addition, recovering market conditions of China are likely to drive top-line growth. The Company anticipates organic sales growth of 5% in FY17. After eliminating the earnings of $0.03 per share from the Farmer John divestiture, Hormel Foods has trimmed its earnings within the range of $1.65 to $1.71 per share against the earlier forecast of $1.68 to $1.74 per share for FY17 due to dismal conditions prevailing in the turkey industry.

Moreover, the Company is enhancing its profitability on the back of its balanced business model. Superior product and process innovation, solid sales of value-added products and greater operational efficiency are expected to support earnings growth. Also, the latest acquisitions of Justin’s LLC and Applegate are expected to boost profits in the near-term.

Stock Performance

Hormel Foods’ stock ended the day at $35.20, slipping 0.20%, at the close on Thursday, March 02nd, 2017, having vacillated between an intraday high of $35.61 and a low of $35.16 during the session. The stock’s trading volume was at 2,287,702 for the day. The Company’s market cap was at $18.95 billion as of Thursday’s close.

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