With increased dine-at-home practices amid the ongoing coronavirus pandemic, consumers are resorting to keeping pantries sufficiently stacked up with food supplies. The trend is empowering several packaged and frozen food products players, including Hormel Foods Corporation HRL. The upside was well exemplified in the company’s third-quarter fiscal 2020 performance, with earnings and sales topping the Zacks Consensus Estimate. Also, sales increased year over year. Results were largely aided by strength in retail and deli businesses, which helped counter declines in foodservice.
That said, let’s take a closer look at the factors that are working in favor of the company, alongside taking a stock of the hurdles in its path.
Strong Demand is a Key Growth Catalyst
During the third quarter of fiscal 2020, Hormel Foods’ net sales of $2,381.5 million surpassed the Zacks Consensus Estimate of $2,293 million and rose about 4% year over year, while organic sales moved up around 2%. The company’s Grocery Products and Refrigerated Foods segments did well in particular. Channel-wise, U.S. retail net sales climbed 19% and U.S. deli net sales grew 4%. The company particularly gained from increased retail sales in all brands, thanks to the rising demand amid the coronavirus-led pantry-loading and stay-at-home trends. In fact, Hormel Foods continued to see market-share gains in several categories. Such favorable trends, especially strength in the retail business, are expected to be mirrored in the fourth quarter as well.
Strong Brands & E-commerce are Upsides
Hormel Foods has been gaining from its robust e-commerce offerings, including direct-to -consumer as well as online grocery pickup and delivery services. Certainly, the company’s e-commerce investments are paying off. Additionally, a strong brand portfolio has been boosting the company’s performance. Brands like Bacon 1, Fire Braised, Austin Blues, Café H, Natural Choice, Burke, Fontanini, as well as Sadler's Smokehouse (acquired recently) contributed to the company’s growth in third-quarter fiscal 2020. The company has been making strategic advertisement investments to support growth of its brands. It has also been focusing on launching products to meet consumers’ preferences. In this regard, Hormel Foods has been conducting virtual products showcases amid the coronavirus outbreak.
We note that Hormel Foods’ foodservice business has been sluggish amid the ongoing pandemic. This can be attributed to reduced demand from restaurants, hotels, distributors and various other foodservice venues. The segment is likely to remain soft in the fourth quarter as well. Apart from this, escalated supply chain costs are a concern for the company.
Nonetheless, we believe that favorable demand trends across Hormel Foods’ retail and deli food channels will continue to work in favor of the company. Moreover, its grocery and refrigerated foods segments are well placed to cater to rising consumer needs amid the pandemic. These upsides along with efficient capacity expansion and brand growth efforts are likely to help the company battle the aforementioned barriers and fuel growth. Shares of this Zacks Rank #3 (Hold) company have gained 21.9% in the past year against the industry’s decline of 2.9%.
Looking for Solid Food Stocks? Check These
The Hain Celestial Group, Inc. HAIN, with a Zacks Rank #2 (Buy), has an impressive earnings surprise record. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
General Mills, Inc. GIS, with a Zacks Rank #2 (Buy), has a robust earnings surprise record.
Lamb Weston Holdings Inc. LW also carries a Zacks Rank #2, and has a long-term earnings growth rate of 7%.
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