Hormel Foods Zooms Past Revenue Expectations

Sales grew 9.5% to $2.63 billion, beating estimates of $2.62 billion

h1Premium meat products company Hormel Foods Corp. (NYSE: HRL) announced its Q4 FY16 and full year FY16 financial results on November 22nd, 2016.

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.

Q4 FY16 financial highlights

During Q4 FY16, Hormel Foods reported strong results with a 9.5% growth in net revenue to $2.63 billion, beating estimates of $2.62 billion, driven by robust segmental growth. In terms of volume, the Company reported a 9% Y-o-Y growth.

During the reporting quarter, Hormel Foods’ cost of sales increased 6.5% Y-o-Y to $2.02 billion versus $1.90 billion in the year-ago period. Gross margin expanded 220 basis points (bps) to 22.8%. Selling, general, and administrative expenses rose 29.1% Y-o-Y to $244 million. Despite the higher costs, the company’s operating margin rose to 13.9% compared to 12.2% in the year-ago quarter. As a result, Hormel Foods reported a record net earnings growth of 30% to $244 million from $187 million in the year-ago period. The company’s diluted EPS grew a record 29% to $0.45 from $0.35 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 fell 12.8% to $9.16 billion during its latest quarterly results.

For the full year FY16, sales grew to $9.52 billion versus $9.26 billion in FY15. Net earnings grew to $890 million, or $1.64 per share, from $686 million, or $1.27 per share, in the previous year.

Segmental highlights

During the reporting quarter, three out of five segments delivered volume, sales and earnings growth.

Refrigerated Foods: In this segment, profit jumped 51% driven by excellent results in the company’s foodservice and retail channels in addition to lower input costs. Sales grew 8% on volume growth of 9% aided by foodservice products such as HORMEL BACON fully cooked bacon and HORMEL pepperoni, and retail products such as APPLEGATE deli meats, HORMEL NATURAL CHOICE meats, and HORMEL GATHERINGS party trays. Refrigerated Foods accounted for 47% of net sales, and 44% of total segment’s operating profit during the reporting quarter.

Jennie-O Turkey Store: In this segment, profit jumped 26% and sales increased 29% following the recovery from highly pathogenic avian influenza in FY15. Increased earnings reflect improved live production results in addition to strong sales growth from JENNIE-O branded foodservice products. Jennie-O Turkey Store accounted for 21% of net sales, and 24% of total segment’s operating profit during the reporting quarter.

International & Other: In this segment, profit fell 16% while sales rose 2%, as high pork raw material costs and soft retail demand continue to weigh on the China meat business. International & Other accounted for 5% of net sales, and 5% of total segment’s operating profit during the reporting quarter.

Grocery Products: In this segment, sales jumped 16% on the inclusion of JUSTIN’S specialty nut butters along with strong sales of SPAM luncheon meat and SKIPPY peanut butter. The segment’s profit grew 5%. Grocery Products stepped up advertising for key products such as SKIPPY P.B. Bites during the quarter. Grocery Products accounted for 19% of net sales and 22% of total segment’s operating profit during the reporting quarter.

Specialty Foods: In this segment, profit decreased 10% and sales fell 20% 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 5% of total segment’s operating profit during the reporting quarter.

Other highlights

Cash and cash equivalents: At the end of Q4 FY16, Hormel Foods had cash and cash equivalents of $415.1 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) remained mostly unchanged.

For FY16, Hormel Foods generated cash of $992.8 million from operating activities, marginally up 0.1% Y-o-Y. Capital expenditure on purchase of property and plant totaled $249.3 million, compared to $125.6 million a year ago.

Dividends: Effective FY17, the Board of Directors has increased the annual dividend by 17% to $0.68 per share. Effective November 15th, 2016, the company paid its 353rd consecutive quarterly dividend at the annual rate of $0.58 per share.

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 is expected to close by 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.

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 earnings of $0.03 per share from the Farmer John divestiture, Hormel Foods projects earnings within the range of $1.68 to $1.74 per share in FY17.

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

h2Hormel Foods’ stock ended the day at $34.24, slipping 3.47%, at the close on Wednesday, November 30th, 2016, having vacillated between an intraday high of $35.58 and a low of $34.15 during the session. The stock’s trading volume was at 5,609,346 for the day. The Company’s market cap was at $18.12 billion as of Wednesday’s close.

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