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Tyson Foods (TSN) Gains on High Retail Demand, Cost Woes Stay

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Zacks Equity Research
·4 min read
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Tyson Foods, Inc. TSN is in a good shape, with its retail business thriving on elevated at-home consumption amid the pandemic. Further, rising demand for protein-packed products has been aiding Tyson Foods, which remains focused on enhancing its brand portfolio to keep pace with consumers’ interests. However, the company has been battling hurdles in its foodservice business due to the pandemic-led social distancing. Also, costs associated with COVID-19 have been concerning.

Retail Strength & Rising Demand for Protein

Tyson Foods has been benefiting from increasing demand in its retail channel, thanks to higher at-home consumption amid the pandemic. In the fourth quarter of fiscal 2020, the company’s retail core business lines saw share growth for the ninth consecutive time. Core retail line volumes rose about 15% in the last 13 weeks, per management’s conference call on Nov 16. In fact, given the rising demand, the company has also shifted part of its foodservice production to concentrate on retail. Management expects to see elevated at-home dining in fiscal 2021, which is likely to aid retail volumes. Another channel performing well for Tyson Foods is e-commerce, which saw its sales more than double in the fourth quarter and surge 99% in fiscal 2020 as more consumers are buying online amid the pandemic. Management expects continued strength in the e-commerce channel.

Apart from these, Tyson Foods remains focused on increasing protein production to cater to the rising demand for protein-packed food. For fiscal 2021, USDA expects overall domestic protein production (chicken, beef, pork and turkey) to rise about 1% year over year. In the Beef segment, USDA projects domestic production to grow about 2% in fiscal 2021. In the Prepared Foods segment, the company focuses on responding to the changing consumer behavior as it goes into fiscal 2021. Finally, the company anticipates better results from its operations in the International/Other segment. Though management projects food and protein demand to shift among different sales networks and witness short-term hiccups amid the pandemic, worldwide demand is expected to increase over time. Notably, management anticipates sales to be $42-$44 billion in fiscal 2021.

Will Hurdles be Countered?

While Tyson Foods is benefiting from rising retail demand, foodservice demand continues being affected by below-normal operations at schools and cafeterias. These factors, along with increased staff absenteeism amid the pandemic, have been elevating costs and complexities regarding the company’s operations in the United States as well as Europe. The company expects to continue facing pandemic-related hurdles in the first half of fiscal 2021.

Besides, high costs have been concerning Tyson Foods, which incurred $200 million as direct incremental expenses associated with COVID-19 in the fourth quarter. Incremental COVID-19 costs amounted to $540 million for fiscal 2020. These include escalated costs related to workers’ health and production facility downtimes, such as personal protection equipment, sanitization of production facilities, testing for coronavirus and product downgrades, among others. Apart from these, certain indirect COVID-19 costs like raw materials, transportation, underutilization and reconfiguration of plant, premiums offered to cattle producers and discounts on pricing dented results. Management expects COVID-19 costs worth roughly $330 million in fiscal 2021.

That being said, this Zacks Rank #3 (Hold) company has been committed to several operational and supply-chain efficiency programs to place itself better for the long run. Also, the company is constantly looking for ways to improve cost structure, alongside achieving operational improvements and providing better customer service. These upsides, together with Tyson Foods’ robust brand presence, geographical reach and solid retail business, bode well.

Shares of this renowned meat products company have rallied 10.4% in the past three months against the industry’s decline of 1.1%.

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