Despite softness, Hormel still bullish on Skippy

by Monica Watrous
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Sales of Skippy softened during the first quarter.

AUSTIN, MINN. — Strong sales growth and lower turkey and pork costs led to a record first quarter for Hormel Foods Corp. The company earned $172,430,000 for the period ended Jan. 25, equal to 65c per share on the common stock, up 12% from $153,348,000, or 58c per share, in the prior-year quarter. Net sales rose 6.8% to a record $2,395,073,000, which compared with $2,242,672,000.

The company achieved the higher-than-expected results with no help from the Skippy peanut butter brand, which Hormel acquired from Unilever at the beginning of 2013. But despite softer sales during the quarter, the company still believes in Skippy.

“Even this current quarter where we experienced some down sales in the grocery part of it, the domestic U.S. part, we really feel that’s a short-term reaction to some kind of the pricing activity going on within the category, and we’re still very bullish on the item long term, and we’ve done a good job of gaining new distribution,” said Jeff Ettinger, chairman, president and chief executive officer, during a Feb. 19 earnings call with financial analysts. “We have our new ad campaign that we have confidence in going forward. We are looking to create innovative products, the first of which are the Skippy Singles items out in the marketplace, and even this quarter Skippy on an international basis enjoyed very good results, and we’re pleased with where that’s heading.”

Operating profit for Hormel’s Grocery Products segment fell 27% to $41,375,000, reflecting charges related to the closing of the company’s Stockton, Calif., manufacturing plant. Sales advanced 2% to $409,751,000, benefitting from growth of Spam, Herdez and Wholly Guacamole, which offset softer sales of Skippy, as well as Hormel chili.

“Our expectation is that Skippy is going to be a solid growth contributor for our company, and it has been every quarter that we owned it except for this one, and so we need to get through this price decrease activity that occurred during the quarter and move on and restore growth there.”

With marketing plans in place and input costs stabilizing, executives expect the Grocery Products segment to deliver significant growth in the year ahead.

“High meat input costs and varied pricing actions in key categories hampered the growth of some of our brands,” Mr. Ettinger said. “Grocery Products is dedicated to strengthening our brands through advertising and merchandising support with campaigns running in the first half of the year for Skippy peanut butter, Hormel chili and Hormel Compleats microwave meals.”

For the Refrigerated Foods segment, operating profit advanced 19% to $101,152,000, driven by growth of value-added products and strategic margin management. Net sales increased 1.4% to $1,144,215,000, led by higher sales of Hormel pepperoni and Hormel Gatherings party trays, and food service sales of cooked bacon and pizza toppings. Volume fell 3% on reduced harvest levels and the dissolution of Precept Foods, a joint venture with Cargill, in December.

“The combination of lower feed costs, a more mild winter and a fairly quick rebound from the PED virus that plagued the industry over the past year is resulting in an increasing domestic hog supply,” Mr. Ettinger said. “Pork remains an excellent relative value to consumers, and we continue to see solid demand from our customers.”

Operating profit for the Jennie-O Turkey Store business unit soared 56% to $93,020,000, reflecting continued growth of value-added products and favorable turkey commodity prices. Net sales increased 10% to $440,019,000, with strong sales of lean ground turkey and rotisserie turkey.

“There’s some commodity element, but we did enjoy solid high-single-digit growth really throughout the value-added pieces of Jennie-O,” Mr. Ettinger said. “The most heralded part of the brand would be the retail products that we’re enjoying excellent success on ground turkey sold, both in tray pack and chub forms that are being supported by the ad campaign, but also a nice quarter from the deli group, rotisserie and some other premium seasoned items.”

The Specialty Foods division posted a 13% decline in operating profit of $18,576,000, due to reduced contract manufacturing during the quarter that offset incremental CytoSport results. Sales climbed 34% to $263,274,000, largely driven by the contribution of Muscle Milk protein nutrition product sales.

Operating profit for the International and Other division tumbled 36%, reflecting one-time charges related to the exit from international joint venture businesses. Sales increased 17%, benefitting from continued strength of Hormel’s China food service and retail businesses, which offset lower Spam luncheon meat exports.

Based on first-quarter performance, the company has raised its full-year adjusted earnings guidance to $2.50 to $2.60 per share, up from the previous projection of $2.45 to $2.55 per share.

“Looking ahead to the rest of fiscal 2015, we believe hog and grain costs will remain favorable,” Mr. Ettinger said. “We expect the high turkey commodity prices, which have been beneficial over the last several months, to trend down as the year progresses.

“We anticipate sales of our value-added products in Refrigerated Foods and Jennie-O Turkey Store will remain strong throughout the year. Lower meat prices will provide input cost relief for some of our Grocery Products categories after we work through higher cost inventories.”
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