Hormel Foods (HRL) Q3 Earnings Top Estimates Amid High Costs

Hormel Foods Corporation (NYSE:HRL) HRL posted third-quarter fiscal 2020 results, wherein the top and bottom lines beat the Zacks Consensus Estimate and the former grew year over year. Results were aided by strength in retail and deli businesses, which helped counter declines in foodservice. However, the company continued to witness escalated supply-chain costs associated with COVID-19. These are likely to continue.

Quarter in Detail

Quarterly earnings of 37 cents per share beat the Zacks Consensus Estimate of 33 cents. The bottom line remained flat year over year. While sales and volumes increased year over year, the company’s operating results were affected by escalated costs associated with COVID-19.

During the quarter, the company absorbed roughly $40 million due to additional supply-chain costs stemming from the pandemic-led soft production volumes, employee bonuses and costs to ensure better safety measures in production units. These costs amounted to $60 million year to date. Management anticipates total additional supply-chain costs of $80-$100 million for fiscal 2020.

Net sales in the third quarter were $2,381.5 million, which surpassed the Zacks Consensus Estimate of $2,293 million. Moreover, the top line increased about 4% year over year, while organic sales grew around 2%. The company particularly gained from increased sales in the retail and deli businesses, together with a revival in the foodservice business. These trends are expected to be reflected in the fourth quarter as well.

Channel-wise, U.S. retail net sales climbed 19% and U.S. deli net sales grew 4%. However, International net sales dropped 2% and the U.S. foodservice net sales declined 19%.

Selling, general and administrative expenses rose slightly to $181.1 million due to increased employee-related costs, largely countered by reduced advertising investments. Operating margin in this quarter contracted 70 basis points (bps) to 10.5% due to escalated costs related to coronavirus.

Segment Details

Sales in the Grocery Products unit rose nearly 7% to $580.8 million and volumes were up 6% on solid consumer demand for center store brands such as Herdez, SKIPPY and Dinty Moore, to name a few. Increased sales and a better mix aided segment profit, which grew 36% year over year.

Net sales in the Jennie-O Turkey Store segment dropped 4% to $286.8 million, with volumes declining 9%. Sales were marred by weak foodservice, commodity and whole-bird sales, partly made up by increased retail sales, which were fueled by Jennie-O lean ground products. Segment profit tanked 67% due to elevated manufacturing and live production costs accountable to impacts from three ongoing plant pauses. Also, high COVID-19 costs dented profits.

The company’s Refrigerated Foods segment generated sales of $1,363.1 million, up 5% year over year. Also, volumes grew 8%. Sales and volumes were fueled by robust demand for branded retail and deli product sales, greater fresh pork commodity sales along with contributions from Sadler's Smokehouse buyout. These upsides countered declines in the foodservice business. Applegate, Hormel Black Label and Columbus brands aided sales in particular. However, segment profit decreased 11% due to sluggish foodservice sales, high costs related to coronavirus and hog hedge-related losses.

International & Other sales inched up 2% to $150.8 million, while volumes fell 5%. Higher sales in China and branded exports were somewhat countered by reduced fresh pork export sales. Notably, the company saw exceptionally solid global demand for SKIPPY peanut butter and SPAM luncheon meat. Segment profit improved 26% on better results in China, along with the company’s partners in Europe, Philippines and South Korea.

Balance Sheet & Cash Flow

The company ended the quarter with cash and cash equivalents of $1,729.4 million and long-term debt of $1,046.8 million (excluding current maturities).

In third-quarter fiscal 2020, Hormel Foods generated cash of $330 million from operating activities. Capital expenditure summed $88 million in the quarter, resulting in operating free cash flow of $242 million. Management expects capital expenditure of $350 million for fiscal 2020. During the quarter, Hormel Foods did not make share buybacks. Nonetheless, on Aug 17, the company paid out its 368th straight quarterly dividend. Hormel Foods’ current annual dividend rate of 93 cents per share reflects an 11% rise from the prior-year period.

Outlook

While management expects its third-quarter sales trend to be mirrored in the fourth quarter, it remains uncertain about the extent of foodservice recovery, performance of the overall food supply chain and macroeconomic conditions. The company further informed that although its foodservice business saw a rebound, it remains below year-ago levels. This trend is also likely to persist in the fourth quarter.

Management noted that its workers have been working relentlessly to cater to the elevated demand and the company is producing much more than ever in some categories. However, in some core categories, robust demand and the adverse impact of the pandemic on the company’s manufacturing facilities have compelled it to explore other solutions to elevate production. This includes reliance on the co-manufacturing allies. Hormel Foods expects factors like limited availability of labor, manufacturing inefficiencies (related to pandemic-led safety measures) and unseasonably reduced inventory levels to hinder its ability to cater to the rising demand for some products in the fourth quarter.

The Zacks Rank #3 (Hold) stock has rallied 15.6% in the past three months, outpacing the industry’s growth of 3.7%.

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Medifast (NYSE:MED) MED, which currently carries a Zacks Rank #1 (Strong Buy), has an impressive earnings surprise record. You can see the complete list of today’s Zacks #1 Rank stocks here.

Campbell Soup CPB, with a Zacks Rank #2 (Buy), has a long-term earnings growth rate of 8.3%.

B&G Foods (NYSE:BGS) BGS, with a Zacks Rank #2, has a robust earnings surprise record.

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