Hormel's profit fell 11 percent on cost squeeze, still beat expectations

Higher raw-materials prices and sluggish turkey sales continue to squeeze profits at Austin-based Hormel Foods, but the company's recent buying spree helped fuel upbeat prospects for the year ahead.

Hormel said Tuesday that its fiscal fourth-quarter profit fell 11 percent to $218.2 million, or 41 cents per share. That beat analysts' expectations by a penny. Revenue dropped 5 percent to $2.49 billion.

For its full fiscal year, Hormel's profit was down 5 percent to $847 million, or $1.57 per share, disappointing results that were salvaged somewhat by operational improvements, stronger demand for pork and $25 million in cuts to the advertising budget.

But investors remain positive on the long-term prospects for the $9.2 billion company best known for Spam. Hormel shares finished the day at $34.52, up 3 percent.

"There's been a lot of uncertainty hanging over the stock the past year," said Brittany Weissman, an analyst at Edward Jones. "These results were more like light at the end of the tunnel. Even with some challenges ahead, you can start to see how they'll emerge stronger at the end of it."

Three rapid acquisitions over a six-week period played a dominant role in the quarterly results, and furthered Hormel's strategy to pump up its portfolio with more profit-rich products and to expand its global reach.

At the end of October, the company announced the largest acquisition in its history: Columbus Manufacturing Inc., a premium deli meat and salami company. The $850 million deal, expected to close in December, followed near back-to-back acquisitions in August of Chicago-based restaurant supplier Fontanini Italian Meats and Sausages and Brazilian meat company Cidade do Sol.

"Refrigerated foods — it's never been fundamentally stronger," Hormel Chief Executive Jim Snee told analysts in a morning conference call. "And what we're doing on the acquisition side is only going to make it stronger."

Looking ahead, Hormel executives were measured but positive about their ability to manage through continued uncertainty in the commodity market. The newly purchased businesses, investments in fast-growing China and increased deli offerings will take the edge off volatility in the hog, pork and turkey markets, they said.

Hormel forecast earnings per share of $1.60 to $1.70 in 2018, not including the 2 to 3 cents per share that Columbus Craft Meats is expected to add. The earnings guidance is in line with consensus expectations of $1.63 per share.

The new businesses and investments in its production process will help Hormel bring new and more profitable products to market faster, said Weissman. Meanwhile, a strong balance sheet puts the company in position to make future acquisitions for long-term growth.

"There's always going to be some commodity influence in this business," Weissman said. "But for the commodity-type business they are in, they are very well diversified. They are very tactical in how they manage those challenges. They have proven that over time."

During the fourth quarter, sales of organic foods, including Hormel Natural Choice products, were a bright spot across both its refrigerated meats and grocery products, which includes canned goods as well as Skippy peanut butter and Wholly Guacamole dips.

Profits in refrigerated foods, by far Hormel's largest business unit with about 47 percent of total sales in the fourth quarter, dropped 13 percent. Much of the decrease came from the divestiture of the Farmer John business. But executives said they already are seeing the positive impact of buying Fontanini, a premium brand that appeals to craft-minded consumers.

Continued oversupply in the turkey industry led to a 24 percent drop in profit at its Jennie-O Turkey Store as farmers overproduced over fears of another avian flu outbreak that didn't materialize. Strong sales in marinated tenderloins and oven-ready products — higher-margin products that command premium pricing — helped offset some of the loss.

Separately, Hormel announced it would merge its specialty foods and grocery products segments to gain more control over the supply chain and reap efficiencies by managing these similar product lines across various retail outlets. The combined operations last year represented about 28 percent of Hormel's overall sales.

Specialty foods is a smaller division that mainly includes health and nutrition products sold at convenience stores, and retailers such as Walmart and Target. The segment accounted for about 9 percent of the total business last year, but has been strained by poor sales of Muscle Milk protein drink. Profit in the unit was down 21 percent during the quarter.

The restructured division will be led by Luis Marconi, current grocery products vice president.

Jackie Crosby • 612-673-7335