Hillshire sales beat after it raises sausage prices

Reuters

(Recasts, adds executive comment, details on meat inflation, updates stock price)

By Lisa Baertlein

May 6 (Reuters) - Hillshire Brands Co on Tuesday reported better-than-expected quarterly sales after raising prices to offset higher costs for the pork and beef used to make its Ball Park hot dogs and Jimmy Dean sausage.

Shares of the company were up 3.5 percent at $36.53 in afternoon trading.

The results from the company, which also sells Hillshire Farm lunch meat and more upscale Aidells sausages and meatballs, came as a host of food companies, including Kraft Foods Group Inc, McDonald's Corp and Chipotle Mexican Grill Inc, raise prices because of soaring pork and beef costs.

Hillshire's third-quarter net sales rose 3.4 percent to $955 million, topping the average analyst estimate of $939 million. Price increases and strong sales of products like Jimmy Dean breakfast sandwiches helped to more than offset an overall volume decline of 3.2 percent.

Net income from continuing operations was $42 million, or 35 cents per share, for the quarter ended March 29, little changed from a year earlier.

"Our brand has gotten a lot stronger. The volume drop is not as severe as they would have been in the old days when we were not supporting the business at the level we've been supporting it at for the last couple of years," Chief Executive Officer Sean Connolly told Reuters. He cited investments in advertising and new products.

Chief Financial Officer Maria Henry said in an interview that ingredient costs this fiscal year will be "more than $100 million above" what was originally planned. Three-quarters of that additional expense is due to a deadly piglet virus, called PEDv, that has reduced supplies and driven up the price of pork, she said.

Hillshire normally spends just over $1 billion a year for meat, Henry said.

The Jimmy Dean fresh sausage business has been one the hardest hit by the spike in pork costs. The base price for that product, which is sold in plastic rolls, is up 15 percent.

History has shown that poorly managed price increases can give customers "sticker shock" and drive them to other brands.

Hillshire expects pork prices to continue to rise, with margins under pressure in its current fourth quarter.

Despite that, executives nudged higher their 2014 forecasts.

Hillshire expects full-year sales growth to be in the low-single-digit percentage range. It had said sales would be slightly above last year, without giving a figure.

The company also expects full-year earnings per share to be at the high end of its forecast for flat to low-single-digit percentage growth.

The Chicago company was formed after Sara Lee Corp spun off its international coffee and tea business in June 2012 into D.E Master Blenders 1753 NV and changed the name of its remaining food business to Hillshire Brands.

(Reporting by Siddharth Cavale in Bangalore and Lisa Baertlein in Los Angeles; Editing by Don Sebastian and Jeffrey Benkoe)

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