Hormel Foods lowers outlook, Q1 net income flat

by Erica Shaffer
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 Hormel
The company cited challenging market conditions in the turkey industry. 
 

AUSTIN, Minn. – Hormel Foods Corp. lowered the company’s fiscal 2017 guidance to $1.65 to $1.71 per share, citing challenging market conditions for turkey. The company also lowered its full-year outlook for its Jennie-O Turkey Store business. The announcement came as Hormel reported financial results for the first quarter.

“We are tempering our full year outlook for the Jennie-O Turkey Store segment given the shortfalls in the first quarter and the expected continuation of pricing pressure due to low commodity turkey prices,” President and CEO Jim Snee said in a statement. “Improvements in our other segments are expected to offset some of the earnings headwinds from Jennie-O Turkey Store.”

Snee added that the company’s balanced model will help offset the challenges facing Jennie-O Turkey Store. “I remain confident in our team's ability to deliver sales and earnings growth by supporting our brands, innovating, and making strategic investments,” he said.

Net income for the first quarter ended Jan. 29, 2017, was flat at $235,147,000, or $0.44 per diluted share, compared to first-quarter 2016 net earnings of $235,061,000, or $0.43 per diluted share.

Net sales for the period eased 1 percent to $2,280,227,000 compared to $2,292,672,000 reported a year ago. Excluding the impact from the Justin’s LLC acquisition, and the divestitures of the Diamond Crystal Brands and the Farmer John businesses, non-GAAP adjusted sales advanced 3 percent.

On a segment basis, Jennie-O Turkey Store profit sharply declined 25 percent to $68,180,000 from $91,303,000 reported in the year-ago quarter. Hormel attributed the result to reduced supplies of turkey due to an outbreak of highly pathogenic avian influenza, higher commodity prices and pricing pressure from competing proteins sold through foodservice, deli and retail stores.

“These impacts, along with increased expenses and increased competition due to an abundance of protein in the market, caused a majority of the decrease,” the company said.

Sales in the segment climbed 13 percent, while volume increased 22 percent. Hormel said the increase in sales for the quarter was linked to “the HPAI impacted results” from 2016.

“Retail sales of Jennie-O lean ground turkey, Jennie-O turkey bacon, and Jennie-O Oven Ready products improved during the first quarter of fiscal 2017,” the company said. “Foodservice and deli sales were also strong, showing significant increases against the HPAI impacted results from the prior year when some products were on allocation.”

Sales in the Grocery Products business increased 7 percent to $417,745,000 in the first quarter, up from $392,218,000 reported a year ago, reflecting the company’s acquisition of Justin’s specialty nut butters along with strong sales of Wholly Guacamole dips, Skippy peanut butter products and Herdez brand salsa, the company said. Segment profit climbed 1 percent. Results were partially offset by higher advertising expenses in support of key brands such as Wholly Guacamole and Herdez, the company said, in addition to integration costs related to the Justin’s acquisition. Hormel said the company expects “segment profit growth in the second quarter due to the addition of Justin’s specialty nut butters and positive sales trends for key product lines including Skippy peanut butter and Wholly Guacamole dips.”

Refrigerated Foods reported $173,808,000 in first-quarter segment profit, an increase of 4 percent compared to $166,908,000 reported in the first quarter of 2016.

The company’s value-added products drove results in the first quarter. “Innovative foodservice items such as Hormel Bacon fully cooked bacon and Hormel Fire Braised meats delivered solid growth,” the company said. “Retail items such as Hormel Gatherings party trays, Hormel Natural Choice meats, and Applegate bacon and breakfast sausage delivered growth.”

Net sales for the segment declined 3.4 percent to $1,123,039,000, compared to $1,123,039,000 reported in the year-ago quarter due to the sale of the Farmer John business, Hormel said. And the company expects the divestiture to weigh sales growth. “Input costs are expected to generally trend higher than fiscal 2016 levels, but continued strong results are expected in the company’s value-added businesses,” Hormel noted.

Results for the Specialty Foods segment reflected the sale of Diamond Crystal Brands (DCB). For the first quarter, net sales in Specialty Foods declined 19 percent to $192,629,000 compared to $237,779,000 reported in the first quarter of 2016. Segment profit eased 0.2 percent to $26,749,000 from $26,793,000 reported a year ago.

“Muscle Milk protein nutrition products and CytoSport powders provided net sales and segment profit gains to mitigate some of the loss from DCB,” the company said. “Innovative new items such as Muscle Milk bars and yogurt smoothies performed well.  Increased advertising investment for Muscle Milk protein nutrition products reduced segment profit gains.

“Looking ahead in fiscal 2017, the company expects the remaining Specialty Foods business to perform better than last year.”

Finally, segment profit in the International business climbed 4.8 percent to $25,463,000 compared to $24,287,000 reported in the first quarter last year. Profit climbed on strong pork export margins. “This increase more than offset reduced margins due to the delay in export shipments…” Hormel said. “The company’s China meat business continued to be challenged with high raw material costs, resulting in profit declines for the first quarter.”

Pork exports saw double-digit increases in net sales growth in the first quarter, but the gains were unable to offset declines for branded exports, according to the company. Net sales in the International segment were down 2.1 percent to $125,825,000 compared with $128,488,000 reported in the year-ago quarter. Hormel said delays in shipments to key markets shifted volume into the second quarter of 2017.

“Entering second quarter, the Company expects pork export margins to remain favorable and growth to resume in branded export categories, including Spam and Skippy,” Hormel said.  “The company’s China operations will continue to be challenged with higher raw material costs though the first half, and start-up costs related to the new plant in Jiaxing, China, which will impact year-over-year comparative results for that business.”

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