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Hormel Foods (HRL) Benefits From Buyouts, Hurt by Costs

Zacks Equity Research
·4 min read

Hormel Foods Corporation HRL is benefiting from strength in its brands and product innovations. Moreover, the company’s focus on buyouts and efforts to enhance its capacity bode well. To top it all, Hormel Foods has been gaining from increased retail sales at all segments, thanks to rising demand amid coronavirus-led pantry loading and stay-at home trends.

Impressively, net sales in second-quarter fiscal 2020 surpassed the Zacks Consensus Estimate and increased 3% year over year. Also, organic sales rose 6% year over year. Notably, shares of this Zacks Rank #3 (Hold) company have gained 8.5% in the past six months against the industry’s decline of 11%.

What’s Aiding Hormel Foods?

Hormel Foods is committed toward making strategic advertisement investments to support growth of its brands. In fact, strength in popular products like Hormel Black Label bacon, Applegate natural and organic products, Columbus grab-and-go charcuterie and Hormel pepperoni boosted growth in the fiscal second quarter. Also, the company focuses on launching products to meet consumers’ preferences. In this regard, it has been conducting virtual products showcases amid the coronavirus outbreak. During the fiscal second quarter, the company has already met its annual 15% innovation goal.

Further, Hormel Foods intends to strengthen its business on the back of strategic acquisitions. In this regard, the company acquired a Texas-based pit-smoked meats company, Sadler's Smokehouse (completed on Mar 2, 2020). The buyout is in sync with its initiatives to strengthen position in foodservice and is already yielding.

Further, the Columbus (completed on Nov 27, 2017) and Fontanini (completed on Aug 17, 2017) buyouts have been helping performance in the Refrigerated Foods segment. Also, the Ceratti acquisition (completed on Aug 24, 2017) is aiding growth in the International segment. These buyouts are expected to continue boosting performance in the forthcoming periods.

Apart from these, Hormel Foods is focused on expanding capacity. Along with its fourth-quarter fiscal 2019 results, the company revealed plans to construct state-of-the-art dry sausage production facility for its Columbus charcuterie products. The envisioned plant will help Hormel Foods expand Columbus products distribution to the East Coast. Also, the company is on track with the expansion of its Burke pizza toppings plant.

Hurdles on the Way

Hormel Foods absorbed nearly $20 million as additional supply-chain costs stemming from the pandemic-led soft production volumes; employee bonuses as well as costs to ensure better safety measures in production units during the fiscal second quarter. Management anticipates further costs worth $60-$80 million in the second half of fiscal 2020, which are likely to be more weighted in the fiscal third quarter. This weighed on the company’s bottom line which lagged the consensus mark and dropped nearly 9% year over year during fiscal second-quarter.

Apart from this, Refrigerated Foods segment came under pressure during the quarter thanks to fall in foodservice sales. The downtick was due to reduced demand from restaurants, hotels, distributors and various other foodservice venues in the wake of COVID-19 outbreak. Also, the pork market was under pressure in the fiscal second quarter due to African swine fever.

In spite of the fact that Hormel Foods is making efforts to overcome the aforementioned hurdles, it is yet to be seen how effective they prove to be.

Top 3 Picks

Church Dwight CHD, with a Zacks Rank #2, has a long-term earnings growth rate of 8.2%. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Campbell Soup Company CPB, with a Zacks Rank #2, has a long-term earnings growth rate of 8.3%.

Kimberly-Clark Corporation KMB, with a Zacks Rank #2, has a long-term earnings growth rate of 5.1%.

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