Hormel Foods Up on Refrigerated Foods Unit, Cost Woes Linger

Hormel Foods Corporation HRL is performing well, courtesy of strength in its Refrigerated Foods segment. The company is benefiting from the focus on enhancing capacity, innovation and contributions from buyouts. Such upsides also aided Hormel Foods in the fourth quarter of fiscal 2019 and helped it stay firm amid challenges in the International segment.

Markedly, the Zacks Rank #3 (Hold) stock has gained close to 5% since the earnings release on Nov 26. Also, the company’s growth endeavors have helped its shares gain 14.5% in the past six months, in line with the industry’s performance. Let’s delve deeper.

Refrigerated Foods Unit Strong

Hormel Foods’ Refrigerated Foods category is steadily growing on the back of a strong brand portfolio and effective strategies. During fourth-quarter fiscal 2019, the unit generated sales of $1,373 million, up roughly 4% year over year. The upside was fueled by products like Hormel Bacon 1 and Hormel Fire Braised as well as retail sales of Hormel Black Label, Columbus, Hormel Natural Choice, Applegate and Hormel Gatherings. We expect the Refrigerated Foods segment to continue benefiting from its value-added growth, effective pricing and innovation.

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

Capacity Expansion Efforts Aiding

Hormel Foods, which shares space with Tyson Foods TSN, is focused on expanding capacity. Along with its fourth-quarter fiscal 2019 results, the company revealed plans to construct a 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 in 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 back half of fiscal 2020.

Hurdles in Hormel Foods’ Path

International & Other revenues declined 12.3% to $145.9 million in the fourth quarter. Additionally, volumes decreased 14%. Results were marred by softness in branded and fresh exports. Also, the company’s Brazilian business delivered a weak performance. Sales in the Grocery Products unit declined about 10% to $584.1 million and volumes decreased 9% due to the divestiture of CytoSport. Further, continued weakness at Skippy (owing to completion in the peanut butter category) hurt organic sales to an extent. Persistence of such trends is a concern.

Apart from this, Hormel Foods has been battling input cost inflation, which affected fourth-quarter fiscal 2019 results.  Global trade volatility along with the African swine fever is leading to input cost inflation in China and Brazil. Input cost headwinds are likely to persist in fiscal 2020. Also, management expects elevated protein prices for fiscal 2020. This, in turn, is likely to negatively impact profits.

Wrapping Up

Strong demand for popular brands like Applegate, Natural Choice, SPAM, Muscle Milk and Wholly Guacamole dips is expected to drive the company’s revenues. Hormel Foods is also committed to making advertisement investments to support growth of its brands. Additionally, the company focuses on product launches to meet consumers’ preferences. Notably, sales from product innovation have increased almost 15% over the last five years. Further, management expects innovation and e-commerce to aid sales growth in fiscal 2020.

This along with the other growth drivers is likely to help Hormel Foods counter the aforementioned challenges and maintain its impressive momentum.

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