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Hormel Foods' (HRL) Refrigerated Foods Unit Solid, Costs High

Zacks Equity Research

Hormel Foods Corporation HRL is benefiting from strength in the Refrigerated Foods segment. The company’s consistent focus on enhancing capacity and undertaking innovative product launches bodes well. Moreover, the company has undertaken acquisitions to strengthen its brand portfolio. However, the Grocery and International units remained under pressure in fourth-quarter fiscal 2019. Moreover, it continues to witness increase in input costs. Let’s take a closer look.

What’s Aiding Hormel Foods?

Hormel Foods’ Refrigerated Foods category is growing steadily on the back of strong brand portfolio and effective strategies. During fourth-quarter fiscal 2019, the segment’s sales rose roughly 4% year over year. The upside can be attributed to products like Hormel Bacon 1 and Hormel Fire Braised as well as retail sales of Hormel Black Label, Hormel Natural Choice, Applegate and Hormel Gatherings. Value-added growth, effective pricing and innovation are likely to continue driving the segment’s performance, going ahead.

In fact, the Columbus and Fontanini buyouts have been driving performance in the Refrigerated Foods segment. With the inclusion of Columbus, the company has been able to develop the new Hormel deli solutions division. This is included within the Refrigerated Foods unit and has been helping the company meet retailer needs. Also, the Ceratti acquisition is boosting the International segment’s performance. These buyouts are expected to continue boosting performance in the forthcoming periods.

Apart from this, Hormel Foods’ expansion efforts are commendable. In its last earnings call, management announced plans to construct state-of-the-art dry sausage production facility for its Columbus charcuterie products. The plant, which is anticipated to be operational in early fiscal 2021, will help Hormel Foods expand Columbus products distribution to the East Coast. Also, the company is progressing well with the expansion of its Burke pizza toppings plant, which is expected to commence production in the latter half of fiscal 2020.

Further, Hormel Foods is committed toward making strategic advertisement investments to support growth of its brands. Additionally, the company focuses on launching products to meet consumers’ preferences. Notably, sales from product innovations have increased nearly 15% in the past five years. Management expects innovations and e-commerce to drive sales growth in fiscal 2020.

On the back of these upsides, shares of the Zacks Rank #3 (Hold) company have increased 13.1% in the past six months compared with the industry’s growth of 10.3%.



Hurdles in Hormel Foods’ Path

All said, Hormel Foods’ Grocery & International units were in a tight spot in fiscal fourth quarter. International & Other revenues declined 12.3%. Nevertheless, volumes decreased 14%. Results were affected by softness in branded and fresh exports. Further, sales in the Grocery Products unit declined about 10% and volumes fell 9% due to the divestiture of CytoSport. Also, persistent weakness at Skippy due to completion in the peanut butter category hurt organic sales to an extent.

Apart from this, the pork market was under pressure in fiscal fourth quarter due to African swine fever. Also, Hormel Foods continues to battle input cost inflation that is likely to persist in fiscal 2020.To top it all, management expects protein prices to increase in fiscal 2020 that are expected to affect profits.

Though Hormel Foods is undertaking various initiatives to lift performance, it is yet to be seen how effective they are in countering the aforementioned challenges.

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