Hormel Foods pressured on multiple fronts during third quarter

by Keith Nunes
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Hormel Foods pork roast, pork belly, pork bellies
The rising cost of pork bellies pressured Hormel's earnings during the quarter.
 

AUSTIN, MINN. — The rising costs of pork bellies and beef trim, and a weak market for turkey combined with disappointing results from its Specialty Foods business unit affected Hormel Foods Corp.’s earnings during the third quarter of fiscal 2017, ended July 30. The company lowered its full-year guidance due to the weak quarterly results.

Net income for the quarter was $182,508,000, equal to 35c per share on the common stock, down from $195,654,000, or 37c per share, in the same period a year ago.

Sales for the quarter also fell to $2,207,375,000 compared to the previous year when sales were $2,302,376,000.

Pork bellies prices chart
 

There were several issues that pressured Hormel’s earnings during the quarter, most notably the rising costs of pork bellies and beef trim. Since late April, belly prices have more than doubled and currently are trading at approximately $2 per lb, according to the company. While the price of 50% beef trim has fallen recently, prices remain elevated compared to the same period of the previous year.

Jim Snee, Hormel
Jim Snee, president and c.e.o. of Hormel Foods

“While we generate bellies internally through the hog harvest process, we also procure (a) large quantity of bellies externally,” said James P. Snee, president and chief executive officer of Hormel Foods, during an Aug. 24 call with financial analysts. “The speed and magnitude of these increases pressured both our retail and food service bacon business. We have implemented price increases, with the majority being realized late in the fourth quarter.

“We also saw 50% beef trim prices hit record levels this quarter. As a reminder, we procure all our beef meats externally for products in Grocery Products and International such as Hormel Chili, Dinty Moore Beef Stew; and products in Refrigerated Foods, such as Hormel Pepperoni and dry sausage items.”

The company’s Jennie-O Turkey Store business unit remains challenged, with sales down 9% during the quarter and volume down 7%, driven by management’s decision to reduce production levels.

Hormel Foods Hormel Chili, Dinty Moore Beef Stew and Hormel Pepperoni
Higher beef trim prices challenged Hormel, which uses beef meat in its chili, pepperoni and Dinty Moore beef stew.
 

“Similar to the first half (of the fiscal year), three main issues affected Jennie-O Turkey Store's profitability this quarter: low turkey markets, elevated competition and increased expenses,” Mr. Snee said.

He added that competition for Jennie-O Turkey is not only coming from other turkey processors. While 50% beef trim prices have risen, the increase has not translated to higher ground beef prices at retail.

The CytoSport business, which is included in Hormel’s Specialty Foods business unit, also had a disappointing quarter.

Beef trimmings prices chart
 

“We experienced a sharp decline in Muscle Milk ready-to-drink protein beverages as investments in the brand did not drive the expected growth,” Mr. Snee said. “We continue to see aggressive competitive activity, especially in the convenience store channel. We are making numerous corrective actions, including increased promotional support.”

Taking the issues pressuring the company into consideration, Mr. Snee said Hormel is lowering its full-year earnings per share guidance to $1.54 to $1.58 per share from the previous guidance of $1.65 to $1.71 per share.

“We have faced difficult market conditions this year,” he said. “Commodity markets have been challenging to forecast based on both the volatility of the markets and the velocity of the change. The lag between the input cost increases and when price changes are realized in the marketplace has pressured margins in the short term. We know it is our responsibility to address these shifts and find ways to move the business forward. We have a plan and are executing that plan to realize our long-term goals.” 
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