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Hormel Foods (HRL) Benefits From Capacity Expansion Efforts

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·4 min read
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Hormel Foods Corporation HRL is focused on capacity-expansion endeavors that include buyouts to drive growth. The company benefits from brand strength, improved foodservice business and higher pricing. These factors boosted first-quarter fiscal 2022 results, with net sales and earnings increasing year over year and beating the Zacks Consensus Estimate. Solid performances in the Refrigerated Foods and the Jennie-O Turkey Store businesses also aided results.

For fiscal 2022, management expects favorable demand, pricing actions and continued growth in Columbus charcuterie, Applegate natural and organic meats, Planters snack nuts and foodservice businesses to offset inflationary pressures. HRL projects fiscal 2022 net sales in the range of $11.7-$12.5 billion, indicating growth from $11.4 billion posted in fiscal 2022. Earnings per share (EPS) are envisioned in the range of $1.87-$2.03 for fiscal 2022. We note that the company posted adjusted EPS of $1.73 in fiscal 2022.

That being said, Hormel Foods has been battling higher costs. Let’s delve deeper.

Zacks Investment Research
Zacks Investment Research


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Capacity Expansion Efforts

Hormel Foods intends to strengthen its business on the back of strategic acquisitions. On Jun 7, 2021, the company acquired Planters snacking portfolio from The Kraft Heinz Company KHC. In its last earnings call, management highlighted that Planters continues to perform at the high end of its expectations. The company is on track to launch several innovations like Planters Sweet & Spicy Dry Roasted peanuts and introduce refreshed branding and packaging. The company acquired a Texas-based pit-smoked meats company, Sadler's Smokehouse (March 2020). The buyout is in sync with Hormel Foods’ initiatives to strengthen its position in the foodservice space.

Several other companies in the food space are benefiting from acquisitions like Kraft Heinz, Post Holdings, Inc. POST and The Hershey Company HSY. Recently, Kraft Heinz acquired a majority stake in a Brazil-based condiments and sauces company — Companhia Hemmer Indústria e Comércio ("Hemmer"). The buyout will widen Kraft Heinz's International Taste Elevation platform and enhance its presence across emerging markets. In January 2022, KHC acquired 85% stake in Germany-based Just Spices GmbH (“Just Spices”). The buyout enhances its direct-to-consumer operations and go-to-market expansion.

During the first quarter of fiscal 2022, Post Holdings’ top line included $97.8 million in net sales from acquisitions. This includes the Private label ready-to-eat (PL RTE) cereal business, Egg Beaters liquid egg brand, Almark Foods business and related assets as well as the Peter Pan nut butter brand. On Feb 1, 2021, POST acquired Almark Foods, which is renowned for its hard-cooked and deviled egg products and provides conventional, organic and cage-free products. Also, on Jan 25, Post Holdings acquired Conagra Brands’ Peter Pan peanut butter brand.

Hershey is undertaking buyouts to augment portfolio strength and boost revenues. In December 2021, Hershey acquired Dot’s Pretzels LLC — the owner of Dot’s Homestyle Pretzels — a leading brand in the pretzel category. The addition of Dot’s Pretzels is a perfect match for Hershey’s growing salty snacking portfolio. The company also acquired Pretzels Inc. from an affiliate of Peak Rock Capital. The acquisition expands HSY’s snacking and production capabilities.

Coming back to Hormel Foods, it is on track with strategic investments for boosting capacity. Management is on track to make investments in the International business to accelerate growth. The company highlighted that it would open a new Asia Pacific research and development facility to support operations across China and Southeast Asia by year-end. The company has more plans to build infrastructure in the key Chinese market. Apart from this, management remains focused on initiatives like One Supply Chain, Project Orion and Digital Experience group to accelerate growth.

Cost Hurdles

Hormel Foods has been grappling with escalated SG&A expenses for the past few quarters. During the first quarter of fiscal 2022, SG&A expenses rose to $226 million from $196.4 million reported in the year-ago quarter. Hormel Foods has been encountering inflation and supply chain disruptions which affected its margins. During the quarter, Hormel Foods’ gross profit margin came in at 17.7%, down from 18.3% reported in the year-ago quarter. The downside was caused by double-digit increases in freight expenses and continued supply chain disruptions.

All said, we believe that the aforementioned upsides are likely to sustain Hormel Foods’ performance. Shares of the Zacks Rank #3 (Hold) company have increased 6.1% in the past three months against the industry’s 0.8% decline.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.


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