AUSTIN, MINN. — Hormel Foods Corp.’s transition from an animal protein-centric business to one with a more diversified portfolio hasn’t been without growing pains. Case in point — management called the company’s fiscal 2023 first quarter “disappointing” and attributed at least part of the challenges to its growth, most notably the acquisition of the Planters nut business.
“Compared to our expectations heading into the year, earnings are being pressured by inefficiencies across the supply chain, persistent inflationary pressures and softness in the snack nuts category,” said James P. Snee, chairman, president and chief executive officer, during a March 2 conference call to discuss the quarterly results.
The supply chain inefficiencies stemmed from falling demand in some categories in the wake of the COVID-19 pandemic.
“Since the fall, we have been operating with elevated inventories due to our efforts to increase production, optimize plant performance and return fill rates to historical levels,” Snee said. “We expected this inventory to clear during the normal course of business. This has not happened. And, in fact, we have seen inventories continue to grow in a number of areas. This has resulted in inefficiencies across the supply chain and higher operating costs.
“Simply said, after almost three years of chasing unprecedented demand, our ability to supply our customers, consumers and operators caught up to and in some cases began to exceed demand and we needed to react sooner. Rectifying the inefficiencies caused by elevated inventory levels is the top priority in the company.”
Securities analysts on the call asked which product categories were most impacted by the excess inventory levels, and Snee implied it was across the entire retail portfolio. Actions Hormel is taking to address the situation is to sell the excess inventories and reduce its reliance on third-party warehouses and co-packers. The moves will compress margins in the short term but are necessary to restore profitability to normalized levels and reduce complexity, according to the company.
Snee said that while the Planters business met expectations in fiscal 2022, it is off to a slower-than-expected start in 2023.
“There are numerous factors at play, including general category softness, a consumer shift away from certain higher-priced items, production challenges and timing issues,” he said.
In the second quarter the company plans to focus on driving consumption with greater promotional support and prioritizing varieties and pack sizes that appeal to value-conscious consumers.
Deanna T. Brady, executive vice president of retail, said additional factors affected the performance of the Planters business.
“When I … look to Q1, that was when we cut over the inventory from the prior owner,” she said. “So there is some noise there and some things that happened in the quarter as well as we inherited some distribution losses right out of the gate that the team has been working against. As we head into Q2, we'll recover some of those important distribution points that will really help stabilize the base business.
“We're really energized by the innovation. I was with our Planters R&D and marketing team earlier this week, and the pipeline of innovation that this team has in front of us for both the rest of '23, '24 and beyond is exceptional and really energizing in regards to where they see this business going.”
Net income for the quarter ended Jan. 29 was $217.7 million, equal to 40¢ per share on the common stock, down from the first quarter of fiscal 2022 when the company earned $239.6 million, or 44¢ per share.
Quarterly sales ticked down to $2.97 billion from $3.04 billion the year prior.
Planned lower commodity pork and turkey volumes were the primary drivers of the decrease in sales, said Jacinth C. Smiley, chief financial officer.
“We have now lapped our new pork supply agreement as of January and turkey supplies have improved since the fall,” she said. “We anticipate more normalized volume comparisons for the remainder of the year, barring a return of HPAI (highly pathogenic avian influenza) in the spring.
“Assuming current conditions hold, reduced production volume in our turkey facilities is expected through the end of the second quarter before steadily improving in the back half of the year. This should be supportive of our turkey business as demand for general turkey products remains strong.”
For fiscal 2023, Hormel Foods is guiding net sales growth of 1% to 3% and adjusted diluted net earnings per share in a range of $1.70 to $1.82.
“While we have work to do the rest of this fiscal year, we cannot lose sight of the progress we have made over the last two years,” Snee said. “We are a significantly larger company today, 30% bigger, in fact.”