AUSTIN, MINN. — Hormel Foods’ earnings rose during the second quarter of fiscal 2018, ended April 29. The company benefited from the strength of its Refrigerated Foods business unit, which features such staple brands as Spam, Hormel and Natural Choice. But pressures from rising freight costs, an oversupply of turkey and a very aggressive competitor in the sports nutrition category pressured the company’s performance during the quarter.

Net income for the quarter rose to $237,522,000, equal to 45c per share on the common stock, up from $210,926,000, or 40c per share, in the same period a year ago.

Sales for the quarter rose to $2,330,568,000, which compared with $2,187,309,000 the year prior.

“Total company sales for the quarter were up 7% on a 3% volume increase,” said James P. Snee, chairman, president and chief executive officer, during a May 24 conference call with analysts to discuss the results. “The increases were driven by the recent strategic acquisitions of Ceratti, Columbus Craft Meats and Fontanini.

“On an organic basis, volume decreased 1% while sales were flat. Many value-added brands in each segment grew, but the gains were offset by lower results from Jennie-O Turkey Store, CytoSport and our contract manufacturing business.”

Hormel Natural Choice snack wrapsIn Refrigerated Foods, the company’s largest business unit, sales rose 13.5% to $1,166,967,000 and operating profit increased 18% to $154,192,000.

“Our Hormel Natural Choice franchise showed very strong growth this quarter,” Mr. Snee said. “This past quarter, we fully converted our REV product line to an all-natural formulation and relaunched the products under the Natural Choice brand. The results to date have been impressive.

“Food service sales of Hormel Bacon 1 fully-cooked bacon, Hormel Fire Braised Meats and Café H products all generated excellent growth this quarter as we continue to partner with and deliver innovative solutions to operators who are facing time and labor challenges.”

In Hormel's Grocery Products unit, which was merged with Specialty Foods at the beginning of this fiscal year, sales fell 1.4% to $631,550,000 and operating profit fell 12% to $95,651,000. Mr. Snee attributed most of the issues to Hormel’s CytoSport business.

“The CytoSport business is facing numerous headwinds,” Mr. Snee said. “We are having success in the food, drug and mass channel, which will continue to be an area of focus for us as we work to grow the Muscle Milk brand. While this business is not where we expect it to be, the move into the Grocery Products segment will provide more branding and marketing resources, and I expect that shift will return CytoSport to growth.”

The company’s Jennie-O Turkey Store business faced challenges as well during the quarter. Sales fell 4% to $371,916,000 and operating income fell 33% to $42,356,000. Mr. Snee said an oversupply of turkey was one reason for the weak performance, but added management is seeing some signs the supply issues may be changing.

Jennie-O Turkey Bacon, Hormel“… We are seeing signs of supply reductions,” he said. “We are seeing poultry placements down low single digits, which is a good metric. The cold storage inventories, we’re seeing breast meat down 3%. On the other hand, we are seeing whole birds up 14%. So, as we’re thinking through this, clearly those are some positive indicators for the business. But because of that run-up in whole bird inventories and the decrease in the whole bird market, that’s still going to have an impact on the back half of this year and into early 2019.”

Hormel Foods management reaffirmed its fiscal 2018 guidance of sales in the range of $9.7 billion to $10.1 billion and earnings per share of $1.81 to $1.95.

Mr. Snee said the company kept its guidance range wide, because of marketplace volatility related to the pork market, the turkey market and rising costs associated with freight.