AUSTIN, Minn. — Hormel Foods Corp. faced a lot of market challenges in the third quarter: higher avocado prices in California, African Swine Fever in China and the negative impact of Jennie-O Turkey Store voluntary product recalls. Amid the uncertainty, the company still reported financial results that were followed by a rise in its stock price.
Hormel’s net earnings of $199.4 million, or 37 cents per share on the common stock, in the quarter ended July 28 were down 5 percent from $210.4 million, or 40 cents per share, in the third quarter of the previous year. Net sales slipped 3 percent to $2,290.8 million from $2,359.1 million as the divestiture of the CytoSport business impacted sales negatively. Hormel in April completed the sale of CytoSport to PepsiCo. Inc. for $465 million. Third-quarter organic net sales were flat.
Hormel’s stock on the New York Stock Exchange closed at $42.95 per share on Aug. 22, the day third-quarter results were announced, which was up nearly 5 percent from a close of $40.97 per share on Aug. 21.
“While we admit our expectations were low for this quarter, we believe management deserves credit for navigating an uncertain environment well thus far,” said financial services firm Edward Jones.
Edward Jones maintained a “hold” rating on Austin-based Hormel, pointing out that predicting futures prices for hogs will be difficult with the African swine fever spreading from China to other regions.
“So far we believe the company has dealt with this development well, such as managing the pricing of its products, but we would characterize the outlook as highly uncertain,” Edwards Jones said.
In the third quarter, double-digit earnings growth in Hormel’s Refrigerated Foods segment offset weaker results in Grocery Products.
Within Refrigerated Foods, segment profit rose 13 percent to $171.8 million. Net sales increased 1 percent to $1,301.1 million. Hormel reported strong demand for food service items like Hormel Bacon 1 cooked bacon, Old Smokehouse raw bacon and Hormel Fire Braised products.
“Once again, Refrigerated Foods has demonstrated an ability to generate growth in a volatile market condition,” said James P. Snee, president and CEO of Hormel Foods, in an Aug. 22 earnings call. “The long-term growth of this segment continues to be driven by value-added products, disciplined pricing and a clear focus on innovation.”
Within Grocery Products, segment profit fell 30 percent to $58.8 million. Net sales dropped 11 percent to $543.1 million. Sales were strong for the brands Spam, Don Miguel, Dinty Moore and Herdez.
“Segment profit declined 30 percent year-over-year due to the divestiture of CytoSport, higher avocado cost for our Wholly Guacamole business and lower earnings from our Skippy peanut butter spreads business,” Snee said. “Similar to what we experienced in 2017, avocado cost increased by over 100 percent during the quarter. A smaller California crop and strong global demand are driving the avocado market prices. In response, the MegaMex team is actively managing promotional tactics and will be evaluating pricing as the new crop is harvested during September.”
The Skippy business was impacted negatively by a price decline that Hormel took in the second quarter.
Within Jennie-O Turkey Store, two voluntary product recalls continued to impact the retail business negatively. Segment profit fell 9 percent to $21.3 million. Net sales dropped 5 percent to $298.8 million.
“While we continue to lap distribution losses, we have had a few small wins,” Snee said. “We expect the process of regaining distribution will go well into 2020. Over the last few months, we have made changes to the Jennie-O organization to bring in several experienced leaders from other parts of the company who are charged with restoring growth through new and bold ideas for this business.”
In International and Other, segment profit rose 1 percent to $18.8 million. Net sales of $147.7 million were flat when compared to the previous year’s third quarter. Improved results in China offset the divestiture of CytoSport.
“International is obviously a wild card, uncertainty based on African swine fever and tariffs, but we're optimistic about the business that we have in China,” Snee said. “We feel like we can reflect pricing to accommodate any of the input cost that we have, and then also the Spam and Skippy businesses that we've developed are very strong.”
For the 39 weeks ended July 28, Hormel Foods posted net earnings of $723.6 million, or $1.35 per share on the common stock, which were down 3.7 percent from $751.1 million, or $1.42 per share, in the same time of the previous year. Net sales of $6,995.8 million were down 0.4 percent from $7,021 million.
Hormel Foods reaffirmed earnings guidance of $1.71 to $1.85 per share for the fiscal year.