AUSTIN, MINN. — Hormel Foods’ portfolio of center-of-the-store, shelf-stable food brands and fresh meat products provided a balance that helped support the company as the coronavirus spread throughout the world. But intermittent supply chain disruptions and overall market uncertainty continue to challenge management.
Net income for the second quarter ended April 26 totaled $228 million, equal to 42¢ per share on the common stock, and a decline from the same period of the previous year when the company earned $282 million, equal to 53¢ per share.
Sales for the quarter rose to $2.4 billion from $2.3 billion the year prior.
Items affecting earnings included higher supply chain costs related to lower production volumes, employee bonuses and enhanced safety measures in its processing plants that totaled approximately $20 million.
Citing the uncertainty surrounding the COVID-19 outbreak, the company withdrew its full-year sales and earnings guidance.
“Our leadership team has extensive experience effectively managing through volatile input cost markets and changes in consumer behavior, but we have always done so with a fully functioning supply chain across the industry,” said James P. Snee, chairman of the board, president and chief executive officer, during a May 21 conference call to discuss results. “The COVID-19 pandemic has created industry uncertainty as to whether we will experience further interruptions. Additionally, the foodservice industry is in the very early stages of a recovery, and we are actively monitoring the pace and magnitude of this recovery.”
In Refrigerated Foods, the company’s largest business unit, sales rose to $1.3 billion from $1.2 billion the year prior. Segment profit fell 17%, according to the company. Improved results from such brands as Hormel, Applegate, Columbus and Lloyd’s could not offset a significant decline in foodservice sales.
“Each foodservice segment is experiencing different dynamics during the shelter-in-place restrictions, and each will have a different recovery timeline coming out of the pandemic,” Snee said. “Even though it is early in the third quarter, we are starting to see orders pick up across our foodservice businesses.”
Grocery Products business unit sales rose 8% to $683 million during the quarter. Double-digit growth from the Spam, Skippy, Hormel Chili and Hormel Compleats brands contributed.
“Two keys to Grocery Products' success during the quarter was the sales and marketing team's focus on limiting production to our priority high-volume items and frequent conversations with our customers regarding assortment and product availability,” Snee said. “We know our center-store brands are perfectly suited for value consumers who need affordable, high-quality products for their families. With millions of Americans now unemployed, our shelf-stable products are as important to consumers as they've ever been.”
Improved retail, commodity and whole-bird sales more than offset a decline at foodservice to drive Jennie-O Turkey Store unit sales up 12% during the quarter. Sales totaled $343 million.
In the company’s International and Other business unit sales totaled $149 million.
“International volume decreased 2%, and sales increased 2%,” Snee said. “Branded exports, primarily Spam, offset declines in our China foodservice business. Segment profit increased 62% due to higher branded export margins and increased income from affiliates.”
He added that Hormel’s China operations are now fully operational as that country continues to reopen.
While management sees greater opportunity for its shelf-stable brands, it faces vulnerabilities in its meat processing operations. A number of the company’s plants had to temporarily close during the quarter due to COVID-19.
“In the second half, we expect to incur another $60 million to $80 million of incremental costs that are temporary, and these costs will be weighted to the third quarter,” Snee said.
Keeping Hormel’s plants running is the most important thing that needs to happen for the company to manage costs and reduce lost profits.
“Right now, that seems to be happening, but there's a great deal of uncertainty as to what plants are going to be hit and the volume impact those interruptions will have,” said James N. Sheehan, chief financial officer.