Hormel Foods posts increased profit to close its fiscal year

While many big food companies are struggling to squeeze out profit growth in the face of a fracturing consumer landscape, Hormel Foods Corp. marched ahead with yet another record quarter.

The Austin-based meatpacker reported a 30 percent increase in earnings for the fourth quarter, ending Oct. 30, of its 2016 fiscal year. It continues to benefit from heightened consumer demand for protein and snack products, as well as low grain and feed prices that reduced its costs.

Hormel earned $244 million, or 45 cents per share. Excluding one-time costs related to a plant closure in California and the sale of Diamond Crystal Brands, the company's profit jumped 22 percent. Sales rose 9 percent to $2.6 billion.

It announced ambitious guidance for 2017, forecasting an earnings range of $1.71 to $1.77 per share, or $1.68 to $1.74 per share when excluding the revenue from Farmer John and Saag's brands, which the company announced Monday it is selling. That's up from the $1.64 a share Hormel earned for the 2016 fiscal year.

The maker of Spam, Dinty Moore and Skippy peanut butter continues to move away from being a strictly commodities company to a packaged goods company. Through sales growth within these and other highly branded products, and through more acquisitions, Hormel said it plans to have an operating profit margin between 15 percent and 19 percent by 2020, which would make it a profit leader in the food industry. The company now has an operating profit margin of 14 percent.

"We believe in our ability to continue to develop and grow our value-add portfolio is very strong. It continues to move us away from the commodity side of the business, while there are still commodity elements in our refrigerated foods" business, Chief Executive Jim Snee said in an interview.

Looking at many of its recent acquisitions, including Skippy, nut butter-maker Justin's LLC and Applegate Farms, Snee said Hormel has done a better job of extracting more value and integrating those businesses into its operations. "It's not that others aren't trying to do that, we just feel we have had a better track record of success," he said.

This marked Hormel's 14th consecutive quarter of record earnings.

"Overall, we like this story," said Brittany Weissman, an Edward Jones analyst. "The track record here is really strong and what they've been doing seems to be working. We were pleased to see the strong guidance for 2017."

Three out of Hormel's five business segments saw sales and profit growth in the quarter. The company's largest segment saw the largest growth. Refrigerated Foods — which includes retail products Natural Choice lunch meats, Hormel Gathering party trays and Applegate deli meats, as well as food service products like Hormel pepperoni — accounts for 47 percent of the company's total sales. It recorded a 51 percent profit increase off an 8 percent sales growth. The segment was able to stretch its profit thanks to favorable market conditions.

Meanwhile, Jennie-O Turkey Store had a profit increase of 26 percent off a sales increase of 29 percent. Some of that comparison improvement is due to the recovery from the avian flu outbreak in fiscal 2015.

Sales in grocery products increased 16 percent as a result of Justin's specialty nut butters being included in this category, for a segment profit increase of 5 percent.

Hormel's international category saw 16 percent decline in operating profit due to the high cost of pork in China. And specialty foods had a 10 percent drop in profit due to high advertising investment in its Muscle Milk product. Hormel has signed three star athletes — Stephen Curry of the Golden State Warriors, Clay Matthews of the Green Bay Packers and Noah Syndergaard of the New York Mets — to be spokesmen for the product, marking a significant investment.

"We obviously invested a lot of money there," Snee said. "And we expect that will drive up sales not just in first quarter but well beyond."

The company's results were just under the consensus forecast among analysts polled by Thomson Reuters, who expected 46 cents a share on $2.64 billion in revenue. This was primarily due to high input costs in China and higher advertising spending on its Muscle Milk product. The company expects to see those advertising dollars return benefit by first-quarter 2017.

Hormel shares were up 2.6 percent in trading Tuesday.

Kristen Leigh Painter • 612-673-4767