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Hormel Foods' (HRL) Capacity Expansion Efforts Solid, Costs High
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Hormel Foods Corporation (HRL - Free Report) has been benefiting from its focus on acquisitions. Also, the company has been undertaking strategic investments to bolster capacity. Markedly, Hormel Foods’ International & Other segment has been performing well for a while now, including the second quarter of fiscal 2021, wherein the top line increased year over year and beat the Zacks Consensus Estimate. To top it, management pulled up its sales view for the fiscal.
That being said, the company has been seeing escalated costs associated with COVID-19. Additionally, high raw-material and input costs remain a challenge. Let’s delve deeper.
Solid Q2 Sales & View
Net sales in the second quarter were $2,606.6 million, which surpassed the Zacks Consensus Estimate of $2,420 million and increased 8% year over year. Sales grew across all segments, except Grocery Products. On its second-quarter call, management said that e-commerce sales increased in double-digits in the last 12 weeks (according to IRI) and the company is seeing increased share in key categories.
Results were backed by robust foodservice recovery; elevated retail, deli and international demand; and better supply-chain performance. The company is now gaining on the pre-pandemic period’s efforts to raise production, mainly for the pizza toppings and dry sausage categories. Management remains optimistic about the foodservice industry. Also, it expects to keep witnessing high demand in the retail, deli and international channels. All said, Hormel Foods now projects fiscal 2021 net sales of $10.2-$10.8 billion, up from $9.70-$10.30 billion projected before.
Notably, International & Other sales increased 16.8% to $173.8 million, backed by continued strength in China and solid sales of branded exports. We note that foodservice sales in China have reverted to pre-pandemic periods. Segment profit rose 6% on growth in China and the Philippines, along with increased fresh pork export margins. In fact, management expects continued strength in the International channel in fiscal 2021.
Image Source: Zacks Investment Research
Lucrative Buyouts & Capacity Expansion Endeavors
Hormel Foods has been strengthening its business through acquisitions. Keeping in these lines, the company acquired the Planters snacking portfolio from The Kraft Heinz Company (KHC - Free Report) earlier this week. The buyout is envisioned to enhance Hormel Foods’ margins and cash flows. Moreover, management had earlier stated that it is likely to generate synergies of $50-$60 million by 2024. Prior to this, the company acquired a Texas-based pit-smoked meat company, Sadler's Smokehouse (March 2020). Further, the Columbus (November 2017) and Fontanini (August 2017) buyouts have been aiding the performance.
Moving on, Hormel Foods has been making investments to boost capacity. Notably, the company incurred capital expenditures of $45 million in the second quarter of fiscal 2021. The company stated that it has been making investments in plant-based offerings and is witnessing growth in its plant-based pepperoni and crumbles products. It has seen robust growth in the pizza topping space and is well placed to see further gains, thanks to its new capacity expansion endeavor and the additional pepperoni capacity, which is set to open in fiscal 2022 beginning. Management expects capital expenditures of $260 million for fiscal 2021, which includes major projects like Project Orion and pepperoni capacity expansion in Nebraska, among others. These are aimed at supporting the growth of branded products. Apart from these, management remains focused on making continued investments in the e-commerce channel, which is significant for the company.
Cost Concerns Stay
Hormel Foods has been seeing escalated costs associated with COVID-19. During the second quarter of fiscal 2021, the company absorbed nearly $15 million in direct incremental supply-chain costs, mainly related to better safety measures in its manufacturing facilities amid the pandemic. In the year-to-date period, these costs amounted to $19 million. Management expects these temporary costs to minimize only after COVID-19 subsides. Further, selling, general and administrative expenses rose 3% to nearly $200 million in the second quarter due to employee-related costs. Advertising expenditure amounted to $31 million. Operating margin in the quarter stood at 11.1%, down from 12.1% reported in the year-ago quarter. The downside was a result of increased raw material and feed costs.
Management on its second-quarter earnings call stated that it has witnessed fast escalations in key input costs across its business this year. The company further expects the elevated-cost scenario to persist for the rest of the year. Apart from these, management commented that the labor environment remained difficult during the quarter. Additionally, the company expects freight cost inflation in the back half of the year.
Hormel Foods expects to combat margin pressure with supply-chain enhancements and pricing. However, pricing in such volatile conditions is likely to lag the markets, which in turn will move profits to subsequent quarters.
We note that this Zacks Rank #3 (Hold) stock has gained 5.2% in the past year compared with the industry’s growth of 18.9%.
Nomad Foods (NOMD - Free Report) has a Zacks Rank #2 (Buy) and its bottom line outpaced the Zacks Consensus Estimate by 10.3% in the trailing four quarters, on average.
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Image: Bigstock
Hormel Foods' (HRL) Capacity Expansion Efforts Solid, Costs High
Hormel Foods Corporation (HRL - Free Report) has been benefiting from its focus on acquisitions. Also, the company has been undertaking strategic investments to bolster capacity. Markedly, Hormel Foods’ International & Other segment has been performing well for a while now, including the second quarter of fiscal 2021, wherein the top line increased year over year and beat the Zacks Consensus Estimate. To top it, management pulled up its sales view for the fiscal.
That being said, the company has been seeing escalated costs associated with COVID-19. Additionally, high raw-material and input costs remain a challenge. Let’s delve deeper.
Solid Q2 Sales & View
Net sales in the second quarter were $2,606.6 million, which surpassed the Zacks Consensus Estimate of $2,420 million and increased 8% year over year. Sales grew across all segments, except Grocery Products. On its second-quarter call, management said that e-commerce sales increased in double-digits in the last 12 weeks (according to IRI) and the company is seeing increased share in key categories.
Results were backed by robust foodservice recovery; elevated retail, deli and international demand; and better supply-chain performance. The company is now gaining on the pre-pandemic period’s efforts to raise production, mainly for the pizza toppings and dry sausage categories. Management remains optimistic about the foodservice industry. Also, it expects to keep witnessing high demand in the retail, deli and international channels. All said, Hormel Foods now projects fiscal 2021 net sales of $10.2-$10.8 billion, up from $9.70-$10.30 billion projected before.
Notably, International & Other sales increased 16.8% to $173.8 million, backed by continued strength in China and solid sales of branded exports. We note that foodservice sales in China have reverted to pre-pandemic periods. Segment profit rose 6% on growth in China and the Philippines, along with increased fresh pork export margins. In fact, management expects continued strength in the International channel in fiscal 2021.
Lucrative Buyouts & Capacity Expansion Endeavors
Hormel Foods has been strengthening its business through acquisitions. Keeping in these lines, the company acquired the Planters snacking portfolio from The Kraft Heinz Company (KHC - Free Report) earlier this week. The buyout is envisioned to enhance Hormel Foods’ margins and cash flows. Moreover, management had earlier stated that it is likely to generate synergies of $50-$60 million by 2024. Prior to this, the company acquired a Texas-based pit-smoked meat company, Sadler's Smokehouse (March 2020). Further, the Columbus (November 2017) and Fontanini (August 2017) buyouts have been aiding the performance.
Moving on, Hormel Foods has been making investments to boost capacity. Notably, the company incurred capital expenditures of $45 million in the second quarter of fiscal 2021. The company stated that it has been making investments in plant-based offerings and is witnessing growth in its plant-based pepperoni and crumbles products. It has seen robust growth in the pizza topping space and is well placed to see further gains, thanks to its new capacity expansion endeavor and the additional pepperoni capacity, which is set to open in fiscal 2022 beginning. Management expects capital expenditures of $260 million for fiscal 2021, which includes major projects like Project Orion and pepperoni capacity expansion in Nebraska, among others. These are aimed at supporting the growth of branded products. Apart from these, management remains focused on making continued investments in the e-commerce channel, which is significant for the company.
Cost Concerns Stay
Hormel Foods has been seeing escalated costs associated with COVID-19. During the second quarter of fiscal 2021, the company absorbed nearly $15 million in direct incremental supply-chain costs, mainly related to better safety measures in its manufacturing facilities amid the pandemic. In the year-to-date period, these costs amounted to $19 million. Management expects these temporary costs to minimize only after COVID-19 subsides. Further, selling, general and administrative expenses rose 3% to nearly $200 million in the second quarter due to employee-related costs. Advertising expenditure amounted to $31 million. Operating margin in the quarter stood at 11.1%, down from 12.1% reported in the year-ago quarter. The downside was a result of increased raw material and feed costs.
Management on its second-quarter earnings call stated that it has witnessed fast escalations in key input costs across its business this year. The company further expects the elevated-cost scenario to persist for the rest of the year. Apart from these, management commented that the labor environment remained difficult during the quarter. Additionally, the company expects freight cost inflation in the back half of the year.
Hormel Foods expects to combat margin pressure with supply-chain enhancements and pricing. However, pricing in such volatile conditions is likely to lag the markets, which in turn will move profits to subsequent quarters.
We note that this Zacks Rank #3 (Hold) stock has gained 5.2% in the past year compared with the industry’s growth of 18.9%.
2 Solid Food Stocks
Medifast (MED - Free Report) , which currently carries a Zacks Rank #1 (Strong Buy), has a trailing four-quarter earnings surprise of 12.7%, on average. You can see the complete list of today’s Zacks #1 Rank stocks here.
Nomad Foods (NOMD - Free Report) has a Zacks Rank #2 (Buy) and its bottom line outpaced the Zacks Consensus Estimate by 10.3% in the trailing four quarters, on average.
Bitcoin, Like the Internet Itself, Could Change Everything
Blockchain and cryptocurrency has sparked one of the most exciting discussion topics of a generation. Some call it the “Internet of Money” and predict it could change the way money works forever. If true, it could do to banks what Netflix did to Blockbuster and Amazon did to Sears. Experts agree we’re still in the early stages of this technology, and as it grows, it will create several investing opportunities.
Zacks’ has just revealed 3 companies that can help investors capitalize on the explosive profit potential of Bitcoin and the other cryptocurrencies with significantly less volatility than buying them directly.
See 3 crypto-related stocks now >>