Acquisitions of Justin’s LLC and Applegate expected to boost profits in near term
Premium meat products company Hormel Foods Corp. (NYSE: HRL) announced its Q3 FY16 financial results on August 18th, 2016. The Company’s revenue in FY15 was $9.26 billion.
The Austin, Minnesota-based Company produces a range of meat and food products and markets those products in the U.S. 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.
Q3 FY16 financial highlights
During Q3 FY16, Hormel Foods reported strong results with a 5.2% growth in net revenue to $2.3 billion, beating estimates of $2.2 billion. In terms of volume, the Company reported a 1% Y-o-Y growth.
During the reporting quarter, Hormel Foods’ cost of sales was up 2.7% to $1.8 billion, representing 79.4% of net revenue versus 81.3% in the year-ago quarter. Gross margin expanded 190 basis points (bps) to 20.6%. Selling, general, and administrative expenses rose 12.1% Y-o-Y to $206.9 million, and comprised roughly 9% of net revenue. The company’s operating margin was 11.9% compared to 10.6% in the year-ago quarter. As a result, Hormel Foods reported a record net earnings growth of 33% to $195.7 million from $146.9 million in the year-ago period. The company’s diluted EPS grew a record 33% to $0.36 from $0.27 per share in the year-ago period.
Hormel Foods’ sales growth is laudable since market leader Tyson Foods Inc. (NYSE: TSN) reported that overall sales dipped 6.7% to $9.4 billion during its latest quarterly results.
During the reporting quarter, three out of five segments delivered volume, sales and earnings growth.
Refrigerated Foods: In this segment, profit jumped 24% aided by the addition of the Applegate business, foodservice sales of OLD SMOKEHOUSE bacon, HORMEL BACON fully cooked bacon, and HORMEL FIRE BRAISED meats, and retail sales of HORMEL NATURAL CHOICE meats and HORMEL GATHERINGS party trays. Brands that experienced sales declines include retail deli products and LLOYDS’ barbeque ribs. Refrigerated Foods accounted for 50% of net sales, and 44% of total segment operating profit during the reporting quarter.
Jennie-O Turkey Store: In this segment, profit jumped 59% and sales increased 20% following the recovery from highly pathogenic avian influenza in FY15. JENNIE-O value-added foodservice and deli products contributed to sales growth during the reporting quarter. The results reflect a $9.6 million mark-to-market loss on hedges. Jennie-O Turkey Store accounted for 18% of net sales, and 20% of total segment operating profit during the reporting quarter.
International & Other: In this segment, profit grew 5% and sales rose 5%, driven by robust exports of fresh pork, SKIPPY peanut butter, and the SPAM family of products. International & Other accounted for 6% of net sales, and 7% of total segment operating profit during the reporting quarter.
Grocery Products: In this segment, profit remained flat due to an increase in advertising spend and transaction costs related to the Justin’s LLC acquisition. Sales grew 3% led by the inclusion of JUSTIN’S products in addition to increases in the SPAM family of products, SKIPPY peanut butter, and WHOLLY GUACAMOLE dips. Grocery Products accounted for 17% of net sales, and 19% of total segment operating profit during the reporting quarter.
Specialty Foods: In this segment, profit decreased 13% and sales fell 25% because continued growth in MUSCLE MILK protein products and new items such as MUSCLE MILK protein smoothies could not offset lower contract packaging sales and the divestiture of Diamond Crystal Brands. Specialty Foods accounted for 9% of net sales, and 10% of total segment operating profit during the reporting quarter.
Appointment of new CFO: On May 26th, 2016, Hormel Foods announced the appointment of James Sheehan as the new CFO of the company, following the retirement of the earlier CFO and Executive Vice President Jody Feragen.
Cash and cash equivalents: At the end of Q3 FY16, Hormel Foods had cash and cash equivalents of $379.6 million, up from $347.2 million in the comparable period last year. However, the company’s long-term debt of $250 million (excluding current maturities) was mostly unchanged. For the first nine months of FY16, Hormel Foods generated cash of $621.7 million from operating activities, down 9.9% from the year-ago period. Capital expenditure on purchase of property and plant totaled $163.2 million, compared to $81.8 million a year ago.
Guidance for FY16
Hormel Foods has raised its full-year FY16 earnings guidance to the range of $1.60-$1.64 per share from the previous projection of $1.56-$1.60 per share. The company expects higher international, Jennie-O Turkey Store and Refrigerated Foods sales to boost aggregate full-year revenue.
Hormel Foods is also expecting steady demand for major branded products like Old Smokehouse bacon, Hormel Fire Braised meat, Muscle Milk Protein products, Skippy & Spam products, and Wholly Guacamole dips, which are expected to drive sales growth in the quarters ahead.
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.
Hormel Foods’ stock ended the day at $38.21, slipping 0.13%, at the close on Thursday, September 2nd, 2016, having vacillated between an intraday high of $38.33 and a low of $37.85 during the session. The stock’s trading volume was at 2,023,358 for the day. The Company’s market cap was at $20.52 billion as of Thursday’s close.