Although several companies around the world are bearing the brunt of concerns associated with the novel coronavirus, a number of consumer staple players are benefiting from the increased demand amid the pandemic-led higher at-home consumption and consumers’ pantry-loading trends. Such trends are boosting food players’ retail businesses in particular. Hormel Foods Corporation (HRL - Free Report) is one such stock that looks well shaped amid the crisis.
The company has been benefiting from increased demand in the retail channel amid the pandemic, a trend which was witnessed in third-quarter fiscal 2020 as well. During the quarter, earnings and sales topped the consensus mark and the latter grew year over year. Results were aided by strength in retail and deli businesses, which helped counter declines in foodservice. Apart from this, focus on buyouts and other brand enhancement endeavors are working well for the company.
Let’s delve deeper and see what lies ahead for this meat products company.
Pandemic-Induced Demand Aids
In the third quarter of fiscal 2020, Hormel Foods’ net sales of $2,381.5 million surpassed the Zacks Consensus Estimate of $2,293 million and advanced about 4% year over year, while organic sales grew around 2%. The company’s Grocery Products and Refrigerated Foods segments did well in particular. Channel-wise, U.S. retail net sales climbed 19% and U.S. deli net sales grew 4%. The company particularly gained from increased retail sales in all brands, thanks to the rising demand amid the coronavirus-led pantry-loading and stay-at-home trends. In fact, Hormel Foods continued to see market-share gains in several categories.
These upsides helped the company counter declines in foodservice. Such favorable trends, especially strength in the retail business, are expected to be mirrored in the fourth quarter as well. Further, the company saw robust strength in e-commerce, including direct to consumer as well as online grocery pickup and delivery. Certainly, the company’s e-commerce investments are paying off.
Brand Strength a Driver
Strength in brands like Bacon 1, Fire Braised, Austin Blues, Café H, Natural Choice, Burke, Fontanini, and Sadler's Smokehouse (acquired in Mar 2020) aided the company’s growth in third-quarter fiscal 2020. Management informed that the pandemic-led demand further accelerated for these brands. Other than Sadler’s Smokehouse, buyouts of Columbus (completed on Nov 27, 2017) and Fontanini (completed on Aug 17, 2017) have been aiding performance. Hormel Foods has been making strategic advertisement investments to support growth of its brands. Additionally, the company focuses on launching products to meet consumers’ preferences.
Can Hurdles be Offset?
While Hormel Foods’ retail business has been performing strongly, it is seeing declines in the foodservice business amid the pandemic. This could be attributed to reduced demand from restaurants, hotels, distributors and various other foodservice venues in the wake of the COVID-19-induced social distancing. In its earnings call, management noted that although its foodservice business saw a rebound, it remains below year-ago levels. This trend is also likely to persist in the fourth quarter.
In fact, while management expects its overall third-quarter sales trend to be mirrored in the fourth quarter, it remains uncertain about the extent of foodservice recovery, performance of the overall food supply chain and macroeconomic conditions. Apart from this, management anticipates total additional supply-chain costs of $80-$100 million for fiscal 2020 and $20-$40 million for the fourth quarter due to COVID-19.
Nonetheless, we believe that the aforementioned upsides, together with gains from the Zacks Rank #3 (Hold) company’s capacity expansion efforts, are likely to help it battle these barriers and fuel growth. Shares of Hormel Foods have gained 5.1% in the past three months compared with the industry’s growth of 0.2%.
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