Hormel faces challenges in first quarter
Feb. 24, 2017
by Monica Watrous
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During the quarter, Hormel's Jennie-O Turkey Store earnings fell 25 percent.
AUSTIN, Minn. — Net earnings attributable to Hormel Foods Corp. in the first quarter ended Jan. 29 were $235,147,000, equal to $0.44 per share on the common stock, which was even with $235,061,000, or $0.44, in the prior-year period. Net sales eased to $2,280,227,000 from $2,292,627,000. Results reflected the divestitures of the Diamond Crystal Brands and Farmer John businesses and the acquisition of Justin’s LLC. Excluding the impact of these transactions, sales increased 3 percent over the year-ago quarter, with adjusted volume up 5 percent.
During the 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 percent. Declining turkey prices, increased expenses and increased competition pressured that segment’s profitability, said Jim Snee, president and CEO.
|Jim Snee, president and CEO of Hormel Foods
“We can handle any one of these issues during a given quarter or year but all three factors in the same quarter created a difficult operating environment that we did not expect,” Snee said during a Feb. 23 earnings call. “First, turkey prices, such as breast meat, have fallen over 60 percent year over year to seven-year lows, which were much lower than we expected… Second, we incurred higher operating expenses primarily for biosecurity measures in our live production system and lower yields in our plant operations. We will continue to make investments throughout our business, including additional investments in biosecurity to protect our business from an avian influenza outbreak.
“Third, as we have addressed in the past, competing proteins continue to pressure our business in addition to increased competitive pressure. We experienced this across all three sales divisions — foodservice, retail and deli.”
Snee said the Jennie-O Turkey Store team is taking the appropriate actions to address near-term operating conditions and challenges.
“We have been through similar turkey commodity cycles before, and we always emerge in a stronger position,” Snee said. “We will continue to support the brand, deliver innovative new items and invest in the business.”
Sales in the Jennie-O segment increased 13 percent with volume up 22 percent over the year-ago period.
Meanwhile, sales in the Jennie-O segment increased 13 percent, with volume up 22 percent over the year-ago period.
Due to challenging market conditions in the turkey industry, the company lowered its fiscal 2017 outlook to $1.65 to $1.71 per share, down from the previous guidance of $1.68 to $1.74 per share. Following the release of the financial results, Hormel Foods shares fell by as much as 5 percent in trading on the New York Stock Exchange from the previous close of $37.30.
Elsewhere in the portfolio, Refrigerated Foods segment profit increased 4 percent in the first quarter, driven by growth of value-added products in foodservice and retail channels. Sales, meanwhile, fell 3 percent, primarily related to the divestiture of the Farmer John business in January. Excluding that impact, adjusted sales decreased 1 percent while adjusted volume was flat.
“Refrigerated Foods continues to benefit from growth in both retail and foodservice value-added products,” Snee said. “In foodservice, innovative items such as Hormel Bacon1 fully cooked bacon and Hormel Fire Braised meats delivered solid growth. In our retail business, items such as Applegate bacon and breakfast sausage, Hormel Gatherings party trays, and Hormel Natural Choice meats delivered very nice growth.”
Items such as Applegate bacon, Hormel Gatherings party trays and Hormel Natural Choice meats delivered growth.
Grocery Products segment profit rose 1 percent, and sales grew 7 percent on the addition of Justin’s specialty nut butters and strong sales of Wholly Guacamole dips, Skippy peanut butter products and Herdez salsa. Adjusted sales increased 3 percent.
“Grocery Products will continue to build momentum, especially in the back half of the year,” Snee said. “We continue to see sales growth aided by product lines such as Skippy peanut butter, Justin’s specialty nut butters and our Mexican foods portfolio.”
Specialty Foods segment profit was flat while sales declined 19%, due to the divestiture of Diamond Crystal Brands last May. Adjusted sales increased 10 percent.
New Muscle Milk bars and Muscle Milk yogurt smoothies continue to perform well.
“CytoSport posted growth this quarter driven by our success in the food, drug, mass and convenience channels in addition to growth in CytoSport powders,” Snee said. “Innovative new items such as Muscle Milk bars and Muscle Milk yogurt smoothies continued to perform well.”
International & Other segment profit increased 5 percent while sales declined 2 percent, as strong fresh pork exports offset declines in branded exports and high pork raw material costs continued to impact the profitability of Hormel’s China meat business.
“We anticipate strong sales for Spam luncheon meat, Skippy peanut butter and CytoSport protein products in the international segment for the year,” Snee said. “We expect the Jiaxing plant to begin producing products in the third quarter, enabling us to produce Spam in China for the first time. We also expect relief in China pork prices in the second half of the fiscal year, which will improve the operating environment for our China meat business.”