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Hormel Foods (HRL) Q2 Earnings Lag Estimates, Sales Rise

Zacks Equity Research

Hormel Foods Corporation HRL, which acquired Sadler’s Smokehouse on Mar 2, has posted second-quarter fiscal 2020 results, wherein the top line improved year over year and beat the Zacks Consensus Estimate. However, earnings declined and lagged the consensus mark. Sales were largely aided by strength in the retail channel — courtesy of the COVID-19-led increased demand. However, foodservice sales dropped sharply. Also, the bottom line was adversely impacted by elevated costs, including those related to the pandemic.

Incidentally, the company is committed toward ensuring employees’ safety across the facilities. Additionally, it has announced bonuses of more than $11 million for all plant production workers. These initiatives entail high costs. Nonetheless, the company believes it is financially stable to navigate through the crisis situation despite the uncertain consumer behaviour, operational hiccups and volatile raw-material markets. However, management withdrew its guidance for fiscal 2020.

Quarter in Detail

Quarterly earnings of 42 cents per share lagged the Zacks Consensus Estimate of 44 cents. Further, the bottom line dropped roughly 9% from adjusted earnings of 46 cents recorded last year. This resulted from a rise in SG&A expenses, along with higher effective tax rate. The company also absorbed roughly $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. Management anticipates costs worth another $60-$80 million in the second half of fiscal 2020, which are likely to be more weighted in the fiscal third quarter.

Hormel Foods Corporation Price, Consensus and EPS Surprise

Hormel Foods Corporation Price, Consensus and EPS Surprise

Hormel Foods Corporation price-consensus-eps-surprise-chart | Hormel Foods Corporation Quote

Net sales were $2,422.5 million, which surpassed the Zacks Consensus Estimate of $2,370 million. Moreover, the top line increased about 3% year over year on rise in sales at International, Jennie-O Turkey Store and Grocery Products units. Additionally, organic sales grew 6% year over year.

The company particularly gained from increased retail sales at all segments, thanks to the rising demand amid coronavirus-led pantry loading and stay-at home trends. In fact, Hormel Foods witnessed market-share gains in all retail categories, including increased sales to traditional retailers, discount chains, mass and club retailers, as well as e-commerce retailers. However, the company’s foodservice sales saw a sharp decline in all segments due to the pandemic.  Channel-wise, U.S. retail net sales climbed 16%, U.S. deli net sales grew 5% and International net sales advanced 11%. International sales were backed by solid exports in the International and Jennie-O Turkey Store units. Nonetheless, the U.S. foodservice net sales slid 21%.

Hormel Foods' volumes witnessed a 4% rise, while it jumped 7% on an organic basis.

Selling, general and administrative expenses flared up on the unfavorable year-over-year comparison related to CytoSport’s divestiture. Operating margin in this quarter contracted 120 basis points (bps) to 12.1%.

Segment Details

Sales in the Grocery Products unit jumped 7.5% to $683.3 million and volumes were up 7% on solid demand for branded retail products, partly offset by CytoSport’s divestiture. Further, organic sales climbed 20%, thanks to the strength in Skippy peanut butter, Hormel chili and Hormel Compleats microwave meals. Increased sales and a better mix aided segment profit, which grew 22.3% to $127.8 million.

Revenues in the Jennie-O Turkey Store segment rose 12.4% to $343.1 million, with volumes rising 19%. Sales were driven by improvements at commodity and whole-bird businesses, along with better higher retail sales, somewhat negated by a fall in foodservice sales. Retail sales were fueled by distribution gains before the coronavirus outbreak and high demand for lean ground products during the pandemic. Segment profit surged 54.1% to $27.3 million, owing to increased sales and better operational and live production performance.

The company’s Refrigerated Foods segment generated sales of $1,247.3 million, down 0.8% year over year. Volumes remained flat year over year, and organic sales dipped 3%. The downside was accountable to a major fall in foodservice sales, partially made up by solid retail and deli products sales, along with contributions from Sadler's Smokehouse buyout. Moreover, segment profit slipped 16.9% to $131.4 million.

International & Other sales inched up 1.7% to $148.8 million and organic sales jumped 3% on the back of robust demand for SPAM luncheon meat and other branded exports, which countered the weakness in foodservice sales (particularly in China). Volumes dipped 1%. Segment profit soared 61.7% to $23.2 million on elevated branded export margins and income from affiliates.

Balance Sheet & Cash Flow

The company ended the quarter with cash and cash equivalents of $606.1 million and long-term debt of $56.9 million (excluding current maturities).

In second-quarter fiscal 2020, Hormel Foods generated cash of $359.9 million from operating activities. Capital expenditure summed $80 million in the quarter, resulting in operating free cash flow of $280 million. Management expects capital expenditure of $340 million for fiscal 2020. During the quarter, Hormel Foods repurchased 0.3 million shares for $12 million.

Price Performance

The Zacks Rank #3 (Hold) stock has gained 7.7% in the past three months, as against the industry’s decline of 6.4%.

Looking for Promising Food Stocks? Check These

BGS Foods BGS, with a Zacks Rank #1 (Strong Buy), has a trailing four-quarter positive earnings surprise of 5.4%, on average. You can see the complete list of today’s Zacks #1 Rank stocks here.

Smucker SJM, with a Zacks Rank #1, has a trailing four-quarter positive earnings surprise of around 2%, on average.

TreeHouse Foods THS has a long-term earnings growth rate of 6.5% and carries a Zacks Rank #2 (Buy), at present.

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