Hillshire Brands slows lunchmeat roll-out

by Keith Nunes
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CHICAGO – During the Consumer Analyst Group of New York conference in Florida in February, Sean Connolly, chief executive officer of the Hillshire Brands Co., outlined Hillshire’s strategy for reinvigorating the company’s packaged lunchmeat business. It appears Connolly may have to wait longer because Hillshire has run into quality problems with the new lunchmeat product packaging.

Calling Hillshire’s packaged lunchmeat business “atrophied” this past February, Connolly said the company was in the process of getting it “back on the rails.” Changes to the business included the start-up of a new processing plant in Kansas City, Kan., the new, up-to-date packaging and new flavor profiles. The packaging changes included a clear format that would communicate the freshness of the product.

But consistency problems with the packaging has forced Hillshire Brands to slow the roll-out as it assesses how much it will cost to improve packaging performance.

“… As the quarter unfolded, we also determined that the transition would be more challenging than had originally been assessed, and that the packaging aesthetics we were seeing were not consistently up to our standards,” Connolly said May 2 in a conference call with financial analysts to discuss Hillshire’s third-quarter results. “While cosmetic, this was unacceptable to us and we immediately mobilized to make several changes. Accordingly, we are refining our execution for more consistent packaging appearance, that [at] the end of the day, this is an excellent brand, and now an even better product, so it’s important we get the packaging right.”

The scope of the packaging problem has the potential to impact Hillshire’s end-of-year results, said Maria Henry, chief financial officer.

“With the first nine months of the year behind us, we are refining our full year fiscal ‘13 guidance,” Henry said on May 2. “We now expect to be at the high end of our EPS guidance range. Our previous sales guidance holds, and we still expect to be up slightly for the year on the top line.

“Our outlook incorporates our expectation of continued investment in MAP [marketing and promotion] and innovation and takes into account the expected sales and earnings impact of the Hillshire Farm lunchmeat package transition. Clearly, that situation puts more variability into how we will land the year than we would normally have with two months to go, and it also influences the EPS guidance we are providing.”

Connolly declined to estimate how much it will cost Hillshire Brands to fix the packaging problem or how it will affect the company’s end-of-year earnings.

“ … We are getting the estimates to be more precise,” he said. “The way I think about it overall, after the last quarter, as you know, we raised our EPS guidance range to the current $1.60 to $1.70. And Q3’s EPS came in a bit better than expected, which enables us to be able to say that we will be at the high end of the range.

“We won't go further, though, as we have to take the actions necessary on lunchmeat, as we discussed in the call. And if that ends up costing us less than we estimate it’s possible we could do a bit better, but we don't want to convey false precision on those estimates at this point.”

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