Hormel Foods took a big hit in its retail segment in the third quarter, driven by volume declines in commodity turkey and private label snack nuts, the company reported Thursday.
The Austin, Minn.-based food giant also reported mixed results on its earnings expectations, announcing 37 cents per share on revenue of $2.96 billion, against Wall Street consensus estimates of 36 cents per share on revenue of $3.05 billion, according to Earnings Whispers.
Meanwhile, several of its retail brands did the heavy lifting for the company for the quarter, including Jennie-O value added and ground turkey, Spam, Applegate meats and Hormel Chili, according to the company.
The results sent the company’s stock value tumbling, dropping about 9% for the day.
“I would characterize Q3 as a solid quarter, though admittedly not as strong as Q2,” said interim CEO Jeff Ettinger. “Our team remained focused on delivering profitable growth, and that focus contributed to another quarter of earnings growth as adjusted earnings per share increased 6% versus last year. On the top line, results were more mixed. Organic net sales declined, with much of the pressure coming from deliberate portfolio-shaping actions, reduced commodity markets, and a still-pressured consumer environment.”
Volume softness in retail
The third quarter’s year-over-year 2% organic net sales decline reflected “portfolio-shaping actions, softer commodity markets and a challenged consumer environment. While adjusted operating margins improved versus the prior year,” according to incoming CEO and President John Ghingo.
The portfolio-shaping actions include the sale of its commodity-oriented whole-bird turkey business to Life-Science Innovations (LSI) in April.
That sale included LSI taking ownership of Hormel’s turkey production facility in Melrose, Minn., a feed mill in Swanville, Minn., and transportation assets.
Hormel noted in April that the sale did not include the company’s use of Jennie-O brand name and the production of a wide variety of turkey-based products, including ground turkey, deli meats, turkey burgers and more, for its retail and foodservice customers.
“In addition, Hormel Foods continues to own and operate its other turkey production facilities, feed mills, transportation assets and live production operations associated with raising and processing turkeys for value-added turkey products,” Hormel said in April.
Hormel’s foodservice business was another bright spot for the company in Q3.
“Premium prepared proteins and branded pepperoni were particularly strong contributors during the quarter, reflecting our ability to align with operator demand for differentiated value-added solutions,” Ghingo said.
Private label snack nuts take a hit
Volume declines were driven by a drop in Hormel’s private label snack nuts and other contract manufacturing businesses, the company said.
“There was a volume contraction that we expected with the elasticity impacts from the two rounds of retail pricing that we announced and implemented late last year and early this year. That was another chunk of it,” according to Ghingo.
That elasticity impact is related to Hormel’s “targeted pricing actions” Ettinger described last year, when he noted that “the steep rise in commodity input costs affecting our industry was the largest contributor to our shortfall.”
The volume declines in private label and contract manufacturing were mitigated by consumption growth with Applegate, Hormel’s center store canned portfolio, Herdez, Hormel Black Label Bacon and Planters, Ghingo explained.
“We’re seeing some really good consumption momentum across a number of those businesses,” he said. “While the environment is not getting easier, we continue to feel really good about our protein-centric portfolio offering value to consumers and some of the pivots we’re making around positioning and marketing those businesses.”
