Turkey continues to be a drag on Hormel Foods Corp.'s financial results with too many birds saturating the market and suppressing profits.
The Austin, Minn.-based company reported Thursday a weaker-than-expected profit of $211 million for the February-through-April period, the second quarter of its fiscal year. Earnings per share fell a penny to 39 cents.
Hormel shares dropped 6 percent and closed Thursday at their lowest level since October 2015.
Jennie-O Turkey Store, the company's third largest business unit, saw its operating profit plunge 29 percent due to competition and pricing pressure.
The sluggish turkey results drew questions from analysts about the long-term implications for the company. Company leaders acknowledged the concerns but reminded investors that this is the nature of fluctuating commodities.
"There is nothing structurally wrong. These are all market-based issues, not fundamental issues," said Jim Snee, Hormel's president and chief executive.
Turkey volume was down 6 percent and revenue down 8 percent. Executives highlighted three issues that contributed to the disappointing quarter for Jennie-O: increased competition, turkey prices hovering around a seven-year low and higher expenses. Some of the overabundance of turkeys is due to a fear of another avian flu outbreak.
"Earlier in the year, there was a fear of another outbreak, so you had people ramping up production," Snee said.
Hormel has lowered its turkey production levels, but the entire industry will need to scale back before the supply-and-demand equation can rebalance. Snee said that could take 12 to 18 months.
Despite the immediate market challenges, turkey remains a high-margin business and it is still profitable for Hormel. In fact, Jennie-O's costs are elevated because Hormel is investing in facility upgrades and new product lines that leadership believes sets the company up for future growth.
"We continue to make investments in our raised without antibiotics line," Snee said. "That is on trend. Rather than make cuts to it we know it will set us up for the long term so we continue to invest in it."
In other products, it was a decent quarter for the company.
Hormel has seen significant growth in its grocery products division while other food companies struggle to improve sales for their center-of-the-store products. The unit, Hormel's second largest unit with 20 percent of the overall business, was a bright spot this past quarter with operating profit up 15 percent. The segment is composed of some of the company's newest and least-conventional brands, like Justin's specialty nut butters and Wholly Guacamole dips, as well as its signature product, Spam.
"This is really interesting because other food companies, who solely operate in the grocery space, are not seeing that kind of growth," said Edward Jones analyst Brittany Weissman.
Refrigerated foods, the company's largest unit that accounts for nearly half of its sales, posted relatively flat operating profit. This segment includes products like Hormel bacon and Natural Choice deli meats.
Sales in its international unit were up 19 percent, leading to an operating profit increase of 38 percent compared to 2016. The specialty foods segment saw an operating profit drop of 16 percent, primarily related to the divestiture of Diamond Crystal Brands last May.
Weissman believes the company will weather this turkey disruption with the help of its business model.
"When you think about the turkey business, it's not the only piece of the company," Weissman said. "The other businesses are strong and that's why they are designed the way they are — when one struggles the other is doing well."
The company maintained its 2017 full-year guidance range of $1.65 to $1.71 per share, but — factoring mid-single digit declines in turkey during the back half of the year — now expects the results will likely land near the lower end.
Hormel has limited personnel expenses by curtailing employee travel, conference attendance and other costs. "Our team knows what needs to be done this year," Snee said.