Hormel Foods struggles in many areas during Q3

by Keith Nunes
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Hormel
Rising raw material costs, competition prompts the company to lower its full-year earnings guidance.
 
AUSTIN, MINN. — The rising costs of pork bellies and beef trim, and a weak market for turkey combined with disappointing results from its Specialty Foods business unit impacted Hormel Foods Corp.’s earnings during the third quarter of fiscal 2017, ended July 30. The company lowered its full-year guidance due to the weak quarterly results.

Net income for the quarter was $182,508,000, equal to $0.35 per share on the common stock, down from $195,654,000, or $0.37 per share, in the same period a year ago.

Sales for the quarter also fell to $2,207,375,000 compared to the previous year when sales were $2,302,376,000.

Pork Belly
 
There were several issues that pressured Hormel’s earnings during the quarter, most notably the rising costs of pork bellies and beef trim. Since late April, belly prices have more than doubled and are currently trading at approximately $2 per lb., according to the company. While the price of 50 percent beef trim has fallen recently, prices remain elevated compared to the same period of the previous year.

“While we generate bellies internally through the hog harvest process, we also procure (a) large quantity of bellies externally,” said James P. Snee, president and CEO of Hormel Foods, during an Aug. 24 call with financial analysts. “The speed and magnitude of these increases pressured both our retail and food service bacon business. We have implemented price increases, with the majority being realized late in the fourth quarter.

“We also saw 50 percent beef trim prices hit record levels this quarter. As a reminder, we procure all our beef meats externally for products in Grocery Products and International such as Hormel Chili, Dinty Moore Beef Stew; and products in Refrigerated Foods, such as Hormel Pepperoni and dry sausage items.”

Hormel
Jennie-O Turkey Store is a subsidiary of Hormel Foods
 
The company’s Jennie-O Turkey Store business unit remains challenged, with sales down 9 percent during the quarter and volume down 7 percent, driven by management’s decision to reduce production levels.

“Similar to the first half (of the fiscal year), three main issues affected Jennie-O Turkey Stores' profitability this quarter: low turkey markets, elevated competition and increased expenses,” Snee said.

He added that competition for Jennie-O Turkey is not only coming from other turkey processors. While 50 percent beef trim prices have risen, the increase has not translated to higher ground beef prices at retail.

Beef Trimmings
 
The CytoSport business, which is included in Hormel’s Specialty Foods business unit, also had a disappointing quarter.

“We experienced a sharp decline in Muscle Milk ready-to-drink protein beverages as investments in the brand did not drive the expected growth,” Snee said. “We continue to see aggressive competitive activity, especially in the convenience store channel. We are making numerous corrective actions, including increased promotional support.”

Taking the issues pressuring the company into consideration, Snee said Hormel is lowering its full-year earnings per share guidance to $1.54 to $1.58 per share from the previous guidance of $1.65 to $1.71 per share.

“We have faced difficult market conditions this year,” he said. “Commodity markets have been challenging to forecast based on both the volatility of the markets and the velocity of the change. The lag between the input cost increases and when price changes are realized in the marketplace has pressured margins in the short term. We know it is our responsibility to address these shifts and find ways to move the business forward. We have a plan and are executing that plan to realize our long-term goals.”

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