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Capacity Expansion Aids Hormel Foods (HRL), High Costs Persist

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Hormel Foods Corporation (HRL - Free Report) is focused on capacity-expansion endeavors that include buyouts, to drive growth. The company is benefiting from acceleration in the Foodservice business as well as sustained demand for retail and deli products. However, escalated costs are a challenge for Hormel Foods.

Let’s delve deeper.

Focus on Capacity Expansion

Hormel Foods has been strengthening its business on the back of strategic acquisitions. On Jun 7, 2021, the company acquired the Planters snacking portfolio from The Kraft Heinz Company (KHC - Free Report) . The buyout includes the Planters, NUT-rition, Planters Cheez Balls and Corn Nuts brands along with three manufacturing units. Prior to this, the company acquired a Texas-based pit-smoked meats company, Sadler's Smokehouse, in March 2020. The buyout is in sync with Hormel Foods’ initiatives to strengthen its position in the foodservice space.

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Hormel Foods is on track with strategic investments to boost capacity. The company incurred capital expenditures of $54 million in the third quarter of fiscal 2021. It has been making investments in plant-based offerings and is witnessing growth in its plant-based pepperoni and crumbles products. Management is encouraged about utilizing its expertise in the pizza toppings category to drive growth in plant-based toppings. The company witnessed robust growth in the pizza topping space and is well placed to see further gains, owing to its capacity-expansion endeavor and the additional pepperoni capacity. During the first quarter of fiscal 2021, management commenced its Burke pizza toppings plant expansion. The company has been making investments to enhance its new R&D centers locally as well as in China.

Management expects capital expenditures of $260 million for fiscal 2021, which includes major projects like pepperoni-capacity expansion in Nebraska and other projects to support branded products growth. Apart from this, Hormel Foods continues to invest in the e-commerce channel, which is significant for the company.

Solid Q3 Performance, Impressive View

During third-quarter fiscal 2021, Hormel Foods’ net sales and earnings increased year over year as well as surpassed the Zacks Consensus Estimate. Net sales increased in all the four segments and channels on an organic basis, with results benefiting from solid consumer demand. Continued growth in the international business and strategic pricing actions across the portfolio also contributed to the upside. Additionally, the company’s solid e-commerce business aided sales growth in the retail and deli channel during the quarter.

Management expects to report record sales and improvement in margin in the fiscal fourth quarter. Hormel Foods raised its fiscal 2021 sales guidance. Management now projects fiscal 2021 net sales in the range of $11-$11.2 billion, up from $10.2-$10.8 billion projected earlier.

Cost Hurdles

Hormel Foods has been seeing higher SG&A costs for a while. During the third quarter of fiscal 2021, the company’s SG&A expenses rose 25% year over year due to one-time acquisition costs and accounting adjustments related to the buyout of the Planters snack nuts business.

During the quarter, the company encountered major inflationary pressure in most areas like raw materials, packaging, freight, labor and many other inputs. Hormel Foods saw significant inflation in pork input costs. Management commented that the labor environment remained difficult during the quarter. Nonetheless, Hormel Foods intends to combat inflationary pressure with strategic pricing actions. Pricing actions are likely to lag the markets, which in turn, will move profits to subsequent quarters.

Shares of the Zacks Rank #3 (Hold) company have declined 13.4% in the past six months compared with the industry’s fall of 5.4%.

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