Hormel's sales soar at grocery stores, drop at restaurants

As Americans settled into life during a pandemic, Hormel Foods Corp. adjusted to changes in where and what they eat.

The company on Tuesday reported record sales during its summer quarter and a profit that beat expectations.

The results were shaped by demand changes, higher costs to keep workers protected against COVID-19 and the effects of production shutdowns at some of its suppliers.

Chief Executive Jim Snee said the Austin, Minn.-based firm is still facing challenges, particularly the prospect of more supply disruptions.

"The magnitude of additional recovery in the food-service industry, the performance of the entire food supply chain and the state of the broader economy remain highly uncertain," Snee said.

But Hormel has already adapted to a number of changes among consumers, chiefly the shift for more at-home consumption, including takeout orders from restaurants.

In grocery stores, Hormel has noticed shoppers are avoiding long interactions at the deli counter. They are now less likely to use the glass deli cases and are instead choosing prepackaged meats and cheeses. Hormel is beginning to see a trend emerge for "freshly sliced" deli meats where a butcher does the slicing and sets it in the cooler for customers to grab-and-go, reducing interaction time.

Meanwhile, brands such as Applegate, which makes natural and organic fresh and frozen meats, is experiencing a boom in new customers looking for fast ways to feed kids suddenly at home for more meals a day.

Overall, Hormel posted a $203 million profit, or 37 cents a share, for the three months ended July 26, the company's third fiscal quarter. Sales amounted to $2.4 billion.

Profit growth was restrained by $40 million in costs for new safety equipment, employee bonuses and reduced production at its plants. Hormel recorded $20 million in such costs in its second quarter, and executives said the company will spend another $20 million to $40 million on them before the fiscal year ends in end of the fiscal year in October.

The company also paid out two rounds of bonuses for production workers, totaling $11 million.

"Those were heroic thank-you bonuses," Snee told the Star Tribune. "While so much of our corporate workforce was able to pivot to a remote setting, our front-line team members showed up out of a real sense of pride and knew our country was counting on them to keep the food supply chain going."

Hormel experienced three pauses in production in slaughter and processing plants earlier this year due to COVID-19 outbreaks. It also had to close some of its own plants for a short time this spring.

Chief Financial Officer Jim Sheehan said Hormel has learned a lot about how to minimize the risk of COVID-19, including smaller work crews, more space between team members on the floor and staggered work breaks. The company creates a paper trail for worker movement, a contact-tracing measure should an outbreak occur.

Line speeds have slowed, reducing daily output. Hormel had a sizable inventory built up in its storage facilities, which were quickly depleted during the production pauses this spring.

"Every day we learn how to run our plants under the current circumstances just a little bit better. There's been tremendous improvement since the start of this pandemic," Sheehan said. "But the safety net of inventory has been dwindled so we need to produce every day."