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Acquisitions Aid Hormel Foods' (HRL), Pandemic-Led Costs Hurt

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Zacks Equity Research
·4 min read
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Hormel Foods Corporation HRL is benefiting from focus on strategic acquisitions and other efforts to enhance capacity. Moreover, strength in its brands and product innovations is yielding. That being said, the company’s foodservice business is seeing softness owing to the coronavirus outbreak. Also, Hormel Foods is grappling with escalated costs. Let’s take a closer look.

What’s Working in Hormel Foods’ Favor?

Hormel Foods intends to strengthen its business on the back of strategic acquisitions. On Feb 11, 2021, the company announced plans to acquire Planters snack nuts business from The Kraft Heinz Company KHC. The acquisition of the Planters business is in tandem with the company’s efforts to expand presence in the fast-growing snacking space. Further, Hormel Foods acquired a Texas-based pit-smoked meats company, Sadler's Smokehouse (March 2020). The buyout is in sync with the company’s initiatives to strengthen its position in the foodservice space.

Along with prudent acquisitions, Hormel Foods is on track with other strategic investments for boosting capacity. Notably, the company incurred capital expenditures of $40 million in the first quarter of fiscal 2021. During the quarter, management commenced its Burke pizza toppings plant expansion. In its last earnings call, management highlighted that it is focusing on expanding the capacity of its pepperoni business. In December 2020, the company announced the opening of a new manufacturing plant — Papillion Foods — situated in Papillion, NE. Incidentally, management expects to incur capital expenditures of $260 million in fiscal 2021.


Further, Hormel Foods’ focus on innovation is yielding results. In recent endeavors, the company introduced the Hormel pretzel bites and cheese tray — a new addition to the Hormel Gatherings line. The launch is appropriate during the increasing home-based working and schooling trend, as well as smaller get-togethers amid COVID-19.

In December 2020, the company introduced its new plant-based protein puffs under the Happy Little Plants brand line-up. With rising health consciousness, plant-based food alternatives are gaining prominence. This provides opportunities for companies like Hormel Foods to diversify and expand. The company has been making strategic advertisement investments to support growth of its brands. Additionally, it focuses on launching products to meet consumers’ preferences.

Is All Rosy for Hormel Foods?

Hormel Foods has been seeing declines in its foodservice business amid the pandemic. This could be attributed to reduced demand from various foodservice venues like college and universities in the wake of COVID-induced social distancing. During the first quarter of fiscal 2021, net sales in U.S. foodservice channel declined 17% year over year. Moreover, escalated costs associated with COVID-19 are a matter of concern for the company. During the fiscal first quarter, it absorbed nearly $15 million in direct incremental supply-chain costs mainly induced by lower production volumes and better safety measures in its manufacturing facilities amid the pandemic.In fact, management expects these temporary costs to decline only after COVID-19 subsides.

That being said, let’s see if the company’s growth endeavors like innovations and capacity enhancement efforts can help it stay afloat amid such headwinds. Shares of this Zacks Rank #3 (Hold) company have gained 3.8% in the past three months compared with the industry’s 10.3% growth.

Better-Ranked Food Bets

Sanderson Farms, Inc. SAFM, currently sporting a Zacks Rank #1 (Strong Buy), has a long-term earnings growth rate of 43.6%. You can see the complete list of today’s Zacks #1 Rank stocks here.

Pilgrim’s Pride Corporation PPC, currently carrying a Zacks Rank #2 (Buy), has a long-term earnings growth rate of 24.2%.

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