AUSTIN, MINN. — Too much turkey in the United States weighed on Hormel Foods Corp.’s earnings during the second quarter of fiscal 2017, ended April 30. The company’s Jennie-O Turkey Store business unit recorded an earnings decline of 29% for the second quarter. Segment sales were down 8%, while volumes retreated 6%. Continued weakness in turkey prices, increased competition and increased expenses all contributed to the struggles at Jennie-O Turkey Store during the second quarter, said James P. Snee, president and chief executive officer.
|James Snee, president and c.e.o. of Hormel|
“First, turkey prices, such as breast meat, have maintained their seven-year lows and in some cases, declined further since the first quarter as the industry continues to be in an oversupply situation,” Mr. Snee said in a May 25 conference call with financial analysts. “History suggests the turkey industry will balance supply and demand and market conditions will improve in the coming months. In turn, we have made additional adjustments to our production levels and would expect volumes slightly under 2014 levels. The impact to our business continues as commodity sales pricing and whole bird pricing is much lower than last year. Lower turkey prices are also pressuring prices in Jennie-O Turkey Store’s three sales divisions: retail, deli and food service.”
Hormel Foods net income during the second quarter totaled $211 million, equal to 40c per share on the common stock, a 2% decline from net income of $215 million, equal to 41c per share, the company earned the previous year.
Sales for the quarter fell 5% to $2.2 billion when compared to the same period of the previous year.
While Hormel’s Jennie-O Turkey Store business struggled, there were bright spots throughout the company’s other business units. Operating profit in the Grocery Products business advanced 15%, while volume climbed 2%. Justin’s specialty nut butters, Wholly Guacamole, Spam and Herdez all contributed to growth in the segment, Mr. Snee said.
The divestiture of the Farmer John business weighed on Hormel’s Refrigerated Foods business unit. Second-quarter operating profit was flat, with sales down 6% and volume down 14%. Excluding the divestiture, adjusted sales advanced 5%, while adjusted volume climbed 1%.
“Growth continues to come from retail food service value-added products,” Mr. Snee said. “In food service, items such as Hormel Bacon fully cooked bacon and Hormel pepperoni delivered excellent growth during the quarter. In our retail business, Hormel Black Label bacon, Hormel Natural Choice meats and Applegate bacon and dinner sausage delivered nice growth.”
In the International business, operating profit jumped 38% on volume growth of 17% and sales growth of 19%.
“Fresh pork exports and branded exports such as Spam had excellent results this quarter,” Mr. Snee said. “Our Skippy peanut butter business in China also performed well.”
Jim Sheehan, chief financial officer, said Hormel Foods expects some short-term volatility in the hog markets during the second half of 2017.
“Overall, hog prices are expected to be higher than last year,” he said. “Belly prices increased sharply in the first part of the quarter but are now comparable to last year. On average, belly prices were approximately 10% higher than last year. We expect belly prices to be above last year as the industry continues to experience lower cold storage levels and high demand for bacon.”
Hormel Foods plans to expand hog production capacity by 6% by late summer.
“As we assess the long-term future of the hog industry, we see three areas of focus: export demand, domestic consumption and total U.S. harvest capacity,” Mr. Sheehan said. “Year-to-date, export demand has been strong. The U.S.D.A. expects exports to be up 10% in 2017.
“Domestic consumption also remained strong. For example, pork feature activity has increased significantly, and pricing has been stable. Depending on the long-term export and domestic consumption trends, we believe rationalization of less-efficient harvest operations may need to occur. We remain confident we are well positioned to make the necessary adjustments in our business to address changes in pork capacity.”
The company’s Specialty Foods operating profit fell 16%, sales declined 24% and volume fell 33% during the second quarter. Excluding the divestiture of Diamond Crystal Brands, adjusted volume was up 3%, while adjusted sales were flat.
Mr. Snee said Muscle Milk protein beverages performed well in the food, drug and mass channels. The company’s new Muscle Milk bars have been well received in the marketplace, he added.
“Looking to the balance of fiscal 2017, the only change to our outlook is for Jennie-O Turkey Store,” Mr. Snee said. “We now expect percentage declines in earnings for Jennie-O Turkey Store to be in the high teens for the second half of the year, with the pressure not abating until the entire industry starts to reduce production levels.“Based on our updated outlook for Jennie-O Turkey Store, we are maintaining our full-year earnings-per-share guidance of $1.65 to $1.71 and expect earnings to be at the lower end of the range.”