Rising costs along with unsteady commodity market is plaguing the performance of most food companies in the United States including Pilgrim's Pride CorporationPPC . The renowned company, engaged in the manufacturing and selling of fresh and frozen as well as value-added chicken products, saw its shares plunge around 52.3% in the past year compared with the industry 's decline of 18.2%. That said, let's take a closer look at the factors troubling this Zacks Rank #5 (Strong Sell) company's performance and see if there are any possibilities of a revival.
Market Volatility & Substitute Meat Market
During the third quarter of 2018, revenues from U.S. operations fell 3.8% year over year, thanks to one of the toughest pricing scenarios in commodity chicken. Further, revenues from Mexican operations fell 10.1% due to an extremely difficult market environment, where pricing was affected by excess supply. These factors led to a slump in the company's overall revenues in during the third quarter.
Going ahead, management is concerned about the reduced demand of commodity chicken, considering the higher availability of other meat-based protein. In fact, the medical community is promoting plant-based protein products over the meat-based ones on account of health risks. The rising demand for plant-based protein is likely to dampen revenues and profits of meat-product producers like Pilgrim's Pride. Further, the United States Department of Agriculture (USDA) predicts that growth of the chicken industry in 2018 will be slightly lower compared with year-ago levels, thanks to higher regulatory concerns denting trade and existence of substitute products.
Rising Costs a Concern
Expanding cost of sales is a significant hurdle for Pilgrim's Pride. Rising costs, if unchecked, can continue to hurt profits in the upcoming quarters. In fact, during the third quarter of 2018, cost of sales rose 9.2% year over year. Moreover, lower sales and increased cost of sales compelled gross profit to slump 64.5% and gross margin to decline 10.8 percentage points to 6.3%. Prior to this, in the second quarter, cost of sales increased 12.5%. Also, high costs have eclipsed the performance of companies like Campbell Soup CPB , General Mills GIS and TreeHouse Foods THS .
To cushion the aforementioned hurdles and boost portfolio, Pilgrim's Pride is focusing on expanding key customers. In this respect, the company tries to develop unique offerings that provide competitive advantages. Additionally, it resorts to frequent supply chain improvements to enhance efficiency and reduce costs. However, such initiatives are yet to bear favorable impacts. That said, until matters take a turn, we prefer to remain on the sidelines.
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