Hormel Foods Corporation HRL posted first-quarter fiscal 2019 results, with earnings surpassing the Zacks Consensus Estimate and marking its third-successive beat. However, the bottom line declined year on year, due to adverse impacts from tax reforms.
Further, the company’s top line missed estimates, but improved on a year-over-year basis. Revenues improved in most of the company’s segments, backed by strong brands. Management also reiterated the outlook for fiscal 2019. Let’s take a closer look at these developments.
Quarter in Detail
Quarterly earnings of 44 cents per share beat the Zacks Consensus Estimate of 43 cents. However, the bottom line declined almost 21.4% year over year, thanks to adverse impacts from tax reform in 2018.
Effective tax rate during the quarter was 21.3% compared with 0.6% in the year-ago quarter. The increase was due to deferred tax remeasurements during fiscal 2018, courtesy of the Tax Cuts and Jobs Act.
Net sales came in at $2,360.4 million, which missed the Zacks Consensus Estimate of $2,400 million. Nevertheless, the top line inched up nearly 1.2% year over year backed by sales growth in three out of four segments.
Further, Hormel Foods witnessed a 1% advancement in volumes. The upside can be attributed to improved volumes in the Grocery Products and International segments.
Hormel Foods Corporation Price, Consensus and EPS Surprise
Hormel Foods Corporation Price, Consensus and EPS Surprise | Hormel Foods Corporation Quote
Sales in the Grocery Products unit inched up 0.5% to $606.8 million, owing to gains from Wholly Guacamole dips, SPAM products, Muscle Milk beverages, Hormel bacon toppings as well as Herdez salsas and sauces. These were countered by declines in the company’s contract manufacturing business. Volumes in this unit improved 3%. Further, operating profit declined nearly 2.3% to $95.3 million.
Revenues in the Jennie-O Turkey Store segment moved down 0.5% to $ 321.2 million, as gains in foodservice and commodity sales were countered by retail declines. Volumes in the segment were almost flat year on year. Operating profit rose 0.5% to reach $37.9 million.
The company’s Refrigerated Foods segment generated sales of $ 1,278.7 million, up roughly 1.9% year over year. The upside was fueled by contributions from branded products like Columbus and Jennie-O deli meats, foodservice sales of products like Old Smokehouse bacon and Hormel Fire Braised products as well as retail sales of Hormel pepperoni, Applegate and Hormel Natural Choice products. Further, volumes in the unit declined 1%. Operating profit improved 3.2% to $162.6 million.
International & Other revenues were up about 2.1% to nearly $153.5 million. The upside can be attributed to higher export sales of SPAM luncheon meat as well as improved results from the China business. However, adverse impacts from tariffs weighed on fresh pork export volumes, sales and profits. Further, volumes in the unit improved 1%. Operating profit increased 1.3% to nearly $25 million.
In the quarter, Hormel Foods’ cost of sales rose 2.1% to approximately $1,872 million.
Selling, general and administrative expenses totaled $193.5 million, down from $219.9 million in the year-ago quarter.
Operating income came in at $306.2 million, up 1.4%. Operating margin remained flat year on year at 13%.
Balance Sheet/Cash Flow
This Zacks Rank #3 (Hold) company ended the quarter with cash and cash equivalents of $512.7 million and long-term debt of $250 million (excluding current maturities).
In the first three months of fiscal 2019, Hormel Foods generated cash of $187.4 million from operating activities. Capital expenditure summed $39 million during the quarter. The company expects capital expenditures to be roughly $350 million for fiscal 2019.
During the quarter, the company repurchased 1.1 million shares for nearly $45 million and paid dividend to shareholders at an annual rate of 84 cents per share.
Recently, the company entered into an agreement with PepsiCo, Inc. PEP to sell the CytoSport business. The transaction, valued at nearly $465 million, is likely to be completed in a month or two and is subject to customary closing conditions.
Management is encouraged regarding growth prospects in categories like Refrigerated Foods, International and Grocery Products. Further, growth witnessed in channels like foodservice, deli and China businesses are impressive. Further, the company expects Jennie-O Turkey Store to stay dismal in fiscal 2019, owing to lower retail sales expectation. Also, global trade uncertainties are likely to continue being a headwind. Nevertheless, management stated that it will consistently strengthen business through innovations and brand building.
That said, management reaffirmed view for fiscal 2019. It continues to envision earnings in the range of $1.77-$1.91, whose mid-point of $1.84 is in line with the current Zacks Consensus Estimate. Further, management expects net sales in the band of $9.70-$10.20 billion.
The stock has declined 4.6% in the past three months compared with the industry’s rise of 2.5%.
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