Hormel's profit growth exceeds expectations, optimistic targets set for 2016

The packaged food industry is in the doldrums, but Hormel Foods still served investors an appetizing outlook Tuesday.

The Austin-based company, maker of everything from canned chili to organic meats, topped Wall Street's fourth-quarter profit expectations. And Hormel raised the bar for its new fiscal year, forecasting profits comfortably above what stock analysts had anticipated.

Lower ingredient prices — for pork and beef, particularly — account for part of the rosier picture. Increased production efficiency does, too. And many of Hormel's products fit well into a key consumer trend: the increasing demand for protein products.

"Hormel plays into the strengths in food right now," said Brian Yarbrough, a stock analyst at Edward Jones. "They are pretty bullish when the rest of the food industry outside of natural and organics is pretty ho-hum."

Increasingly, shoppers are spending more money on the perimeter of the grocery store — home to fresh produce and meat — while focusing less on the so-called "center store," where more processed foods prevail.

Hormel's fresh meat lineup — such as bacon and turkey products — is on the perimeter. And its shelf-stable processed foods like Spam continue to sell well, anyway.

"We are in parts of the store where sales are growing, and even in the center of the store — where it is slowing — we are in pockets of growth," James Snee, Hormel's chief operating officer, said Tuesday in an interview with the Star Tribune.

Added Hormel CEO Jeffrey Ettinger: "It was actually a fantastic year for our traditional canned meat portfolio." Sales of Spam, Dinty Moore stew and Mary Kitchen hash were all up for fiscal 2015, and while chili sales were down for the year, they popped up during the fourth quarter.

Overall, Hormel reported net earnings of $187.2 million, or 69 cents per share, for the quarter ending Oct. 25. Excluding one-time charges, Hormel earned 74 cents per share, up 17 percent from a year ago, and 5 cents above the average estimate of stock analysts polled by Thomson Reuters.

Hormel's sales clocked in at $2.4 billion, down 6 percent and below analysts' expectations of $2.5 billion.

The company's stock closed at $71.32, up $2.06 or 3 percent.

Operating profits in Hormel's grocery division — which includes Skippy peanut butter, Spam and other canned products — were up 57 percent on a sales gain of 4 percent.

In Hormel's largest division, refrigerated foods, operating profits rose 27 percent, though sales fell 5 percent. Higher operating margins on pork products drove the profit gains, and sales of pepperoni and refrigerated entrees helped drive sales.

Hormel's Jennie-O business continued to struggle in the fourth quarter due to avian flu, which this spring killed millions of turkeys in Minnesota and Wisconsin, the company's source of birds. Jennie-O's operating profit fell 23 percent over a year ago, while sales dropped 18 percent.

Still, Jennie-O's performance was better than expected, which helped Hormel top Wall Street's earnings estimates, said Edward Jones' Yarbrough. He said he was projecting an 11 percent operating profit margin for the business, but Jennie-O came in at 17 percent.

Hormel's profits also got a boost from Muscle Milk, the sport beverage maker it purchased in August 2014.

Optimistic outlook

Hormel on Tuesday set its fiscal 2016 earnings guidance at $2.85 to $2.95 per share, compared to analysts' consensus estimate of $2.83 per share.

The reasons for the sunny outlook are many.

Hormel expects lower input costs to continue for its grocery and refrigerated foods businesses. The company upped its profit margin targets for both businesses, also noting increased production efficiencies.

For instance, Hormel has closed a canned chili and stew plant in Stockton, Calif., over the past year, moving production to other factories.

The company expects Jennie-O to return to growth in the second half of the year, and it anticipates strong demand for meat products under its Applegate Farms brand, which was purchased earlier this year.

Hormel also said Tuesday that it's looking to sell its Diamond Crystal business, which does about $250 million in annual sales and makes condiments such as nondairy creamer, sugar, salt and pepper.

"We've kind of found ourselves in a low-growth business," Ettinger said.

Mike Hughlett • 612-673-7003