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Tyson Foods Gains on Retail Demand, Foodservice a Challenge

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Tyson Foods, Inc. (TSN - Free Report) has been benefiting from its brand strength, robust geographical reach and ability to manufacture locally in its international markets and cater well to the evolving global demand. Notably, the company is seeing burgeoning demand in its retail channel, thanks to increased at-home consumption amid the pandemic.

These upsides were witnessed in the company’s third-quarter fiscal 2020 results, which were otherwise hurt by major declines in the foodservice channel. Also, results were affected by coronavirus-led reduced production across all segments stemming from team member shortages and other disruptions. Apart from this, the company saw higher-than-usual operating costs in all segments due to the pandemic. Consequently, both earnings and sales declined year over year and the latter fell short of the Zacks Consensus Estimate in the quarter.

Factors Working Well for Tyson Foods

In the third quarter of fiscal 2020, Tyson Foods saw considerable demand for its key retail and branded products, with core retail line volumes rising more than 26%. The company witnessed higher demand at supermarkets, club stores and other retail channels. In fact, given the rising demand, the company has also shifted part of its foodservice production to concentrate on retail. Such efforts are yielding results. Another channel performing well for Tyson Foods is e-commerce, which saw its sales double in the third quarter as more consumers are buying online amid the pandemic. Management expects e-commerce demand in the grocery and foodservice channel to remain high.

Apart from this, Tyson Foods’ exports to several parts of the world performed well in the third quarter of fiscal 2020. During the quarter, the company witnessed major strength in exports to Japan and Mexico. The company noted that lower hog supplies stemming from the African swine fever present solid opportunities for U.S. exports as well as in-country production to cater to international demand. Also, a major part of the company’s export sales includes items, which don’t fit in traditional Americans’ diets. Thus, exports help the company undertake optimum livestock utilization. The company expects export markets to remain strong for beef and pork segments.

We note that Tyson Foods boasts a rich portfolio of protein-packed brands that are growing rapidly across the globe. Also, the company has been steadily expanding the fresh prepared foods offering owing to consumers’ rising demand for natural fresh meat offerings without any added hormones or antibiotics. For fiscal 2021, USDA expects overall domestic protein production (chicken, beef, pork and turkey) to rise about 1% year over year. Though management expects food and protein demand to shift among different sales networks and witness short-term hiccups amid the pandemic, worldwide demand is expected to increase over time.

Hurdles on Way

Tyson Foods expects to continue facing a slowdown in capacity utilization at its production facilities due to member shortages. Moreover, though every segment is seeing a demand shift from food service to retail, retail volume increases have not been enough to compensate for soft foodservice volumes. Consequently, management expects volumes to decline in the fourth quarter of fiscal 2020, especially in its Chicken and Prepared Foods units. In fact, constraints related to coronavirus are expected to weigh on volumes in the remainder of fiscal 2020 and also fiscal 2021.

Other than this, certain pandemic-led hurdles are expected to elevate the company’s operating cost burden in the remainder of fiscal 2020 and also fiscal 2021. Even in the third quarter, the company incurred $340 million as direct incremental expenses associated with COVID-19. These include escalated costs related to workers’ health, such as personal protection equipment, sanitization of production facilities, testing for coronavirus, and various professional fees and bonuses to frontline workers.

All said, let’s see what awaits this Zacks Rank #3 (Hold) company in the near term. Shares of this renowned meat products player have climbed 1% in the past three months compared with the industry’s growth of 0.2%.

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