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Tyson Foods (TSN) Retail Business Solid, Foodservice Troubled

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Tyson Foods, Inc. (TSN - Free Report) has been benefiting from strength in the retail business, thanks to increased at-home consumption amid the pandemic. This, along with solid e-commerce sales, aided fourth-quarter fiscal 2020 results, wherein earnings and sales grew year over year and beat the Zacks Consensus Estimate. Additionally, Tyson Foods has been gaining on its brand strength, wide reach and ability to cater to evolving demand.

However, the company has been encountering some hurdles related to the pandemic, such as low foodservice volumes and escalated costs. The company’s Chicken segment has been particularly under pressure due to the pandemic-led crisis like soft foodservice volumes. Results in the segment were hurt by operational hurdles associated with COVID-19 as well as channel shift during the fourth quarter. Nonetheless, management is undertaking all efforts to improve performance. Let’s delve deeper.

Factors Working Well for Tyson Foods

The company has been gaining on rising demand in its retail channel, thanks to the increased at-home consumption amid the pandemic. In fiscal fourth quarter, the company’s retail core business lines saw share growth for the ninth consecutive time. Core retail line volumes rose about 15% in the last 13 weeks, per management’s conference call on Nov 16. In fact, given the rising demand, the company has also shifted part of its foodservice production to concentrate on retail.

Management expects to see elevated at-home dining in fiscal 2021, which is likely to aid retail volumes. It also expects to see gradual recovery in foodservice volumes in the fiscal year, unless the current coronavirus wave causes any major shutdown. Another channel performing well for Tyson Foods is e-commerce, which saw its sales more than double in the fourth quarter and surge 99% in fiscal 2020 as more consumers are buying online amid the pandemic. Management expects continued strength in the e-commerce channel.

Notably, Tyson Foods remains focused on higher protein production to cater to the rising demand for protein-packed food. For fiscal 2021, USDA expects overall domestic protein production (chicken, beef, pork and turkey) to rise about 1% year over year. In the Beef segment, USDA projects domestic production to grow about 2% in fiscal 2021. In the Prepared Foods segment, the company expects to remain focused on responding to the changing consumer behavior as it goes into fiscal 2021. Finally, the company anticipates better results from its operations in the International/Other segment. Though management projects 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. Notably, management anticipates sales to be $42-$44 billion in fiscal 2021.

Tyson Foods, Inc. Price, Consensus and EPS Surprise

Tyson Foods, Inc. Price, Consensus and EPS Surprise

Tyson Foods, Inc. price-consensus-eps-surprise-chart | Tyson Foods, Inc. Quote

Roadblocks

Reduced production throughput due to the pandemic in some parts of fiscal 2020 affected sales volumes in the Pork and Chicken segments. Though the company is seeing increased retail demand, foodservice demand continues being affected by below-normal operations at schools and cafeterias. These factors, along with increased staff absenteeism amid the pandemic, have been elevating costs and complexities regarding the company’s operations in the United States as well as Europe. The company expects to continue facing pandemic-related hurdles in the first half of fiscal 2021. Also, Tyson Foods expects food and protein demand to shift among different sales networks and witness short-term hiccups amid the pandemic — which is likely to put pressure on volumes in fiscal 2021.

Additionally, the company incurred $200 million as direct incremental expenses associated with COVID-19, which strained fourth-quarter results to an extent. Incremental COVID-19 costs amounted to $540 million for fiscal 2020. These include escalated costs related to workers’ health and production facility downtime, such as personal protection equipment, sanitization of production facilities, testing for coronavirus and product downgrades, to name some. Apart from these, certain indirect COVID-19 costs like raw materials, transportation, underutilization and reconfiguration of plant, premiums offered to cattle producers and discounts on pricing dented results. Management expects COVID-19 costs worth roughly $330 million in fiscal 2021.

Wrapping Up

Tyson Foods is undertaking a number of operational and supply-chain efficiency programs to place itself better for the long run. Also, the company is constantly looking for ways to improve cost structure, alongside achieving operational improvements and improved customer service. These, along with the company’s robust brand presence, geographical reach and solid retail business especially amid the pandemic are likely to keep it going.

Shares of the Zacks Rank #3 (Hold) company have gained 12.3% in the past three months compared with the industry’s growth of 5.5%.

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