A.I. hampers Hormel's sales

by Monica Watrous
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Hormel reported solid results from Muscle Milk, Skippy peanut butter and value-added meat products in the third quarter.

AUSTIN, MINN. — Despite headwinds from the avian influenza outbreak earlier in the year, executives of Hormel Foods Corp. said 2015 is “shaping up to be an excellent year in terms of earnings growth.”

For the third quarter ended July 26, Hormel earned $146,956,000, equal to 56c per share on the common stock, which was up 6% from $139,014,000, or 52c per share, for the prior-year period. Net sales for the quarter declined 4.2% to $2,188,587,000 from year-ago sales of $2,284,947,000.

“Sales were lower due to turkey supply shortages in our Jennie-O Turkey Store segment and price deflation in the pork markets, primarily impacting sales within our Refrigerated Foods and International segments,” said Jeffrey Ettinger, chairman, president and chief executive officer, during an Aug. 19 earnings call with financial analysts. “To illustrate the dramatic change in pork markets, the average U.S.D.A. pork cut-out price in July 2014 was $133, compared to $83 in July of 2015, almost a 40% decrease.”

Stronger performance elsewhere in Hormel’s portfolio, particularly from the Skippy peanut butter business and the recently acquired Muscle Milk brand of protein nutrition products, helped offset the impact of the turkey shortfall and lower pork prices.

The Grocery Products segment posted net sales of $388,094,000, up 8% from the prior-year quarter, led by increased sales of Hormel chili, Skippy peanut butter and Wholly Guacamole dips in the company’s joint venture with MegaMex Foods. Operating profit advanced 57% to $53,108,000, driven by lower input costs.

“Wholly Guacamole minis in a single-serve container have been a key driver to the brand’s growth this past year,” Mr. Ettinger said. “They squarely meet consumers’ desires for portable, better-for-you snacking options.”

Grocery Products continues to build brand equity and drive sales with marketing support for key items.

Net sales for the Refrigerated Foods segment fell 11% to $1,056,125,000, reflecting the impact of price deflation in pork markets. Operating profit was nearly 9% higher at $97,692,000, including transaction costs associated with the July acquisition of Applegate.

“We enjoyed strong sales growth of many of our value-added items during the quarter, including retail sales of Hormel pepperoni and Hormel Gatherings party trays, and food service sales of Hormel Natural Choice deli meats and Hormel Fire Braised meats,” Mr. Ettinger said.

Jennie-O Turkey Store sales tumbled 12% to $336,533,000, and operating profit plunged 45% to $35,374,000, reflecting the impact of the avian influenza earlier in the year that resulted in volume shortfalls in plant operations and sales.

“We have now repopulated approximately two-thirds of the farms previously impacted, and we expect to complete the repopulation process during the fourth quarter,” Mr. Ettinger said. “While we have been able to purchase some turkey meat from other suppliers to partially offset flock losses, Jennie-O Turkey Store continues to estimate approximately 15% lower sales in the fourth quarter versus last year, similar to the sales impact in the third quarter. Our team continues to work closely with government agencies and other organizations as they study this virus and work to control future outbreaks.”

Net sales for the Specialty Foods segment rose 31% to $282,774,000, driven by the addition of Muscle Milk protein products. Operating profit soared 80% to $31,190,000, as the company recognized synergies within the CytoSport and Century Foods supply chain.

“Innovation is a top priority for our CytoSport business, and we look forward to the launch of some great new items currently in the pipeline for our Muscle Milk brand,” Mr. Ettinger said.

The International and Other segment saw sales decrease almost 7% to $125,061,000, as increased sales of Skippy peanut butter failed to offset declines in pork exports. Operating profit climbed 3% to $19,251,000.

“Looking ahead to the fourth quarter, we expect Refrigerated Foods to benefit from value-added sales increases and lower input costs,” Mr. Ettinger said. “We look for Grocery Products to deliver another quarter of strong segment profit growth, with favorable raw material costs and volume growth in key categories.

“Jennie-O Turkey Store will continue to be significantly challenged due to the impacts of avian influenza on our turkey supply chain. However, we do anticipate modest margin improvement as compared to third-quarter results.

“Specialty Foods should finish the year well, based on the fast-paced growth and improved cost structure of our recently acquired Muscle Milk protein nutrition products.”

Hormel raised its full-year adjusted earnings guidance range to $2.57 to $2.63 per share, up from the previous target of $2.50 to $2.60 per share. The updated outlook represents a 15% to 18% increase over a record performance in fiscal 2014, the company said.
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