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Capacity Expansion Aids Hormel Foods (HRL), Costs Inflated

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Focus on capacity-expansion endeavors including buyouts are working for Hormel Foods Corporation (HRL - Free Report) . The company is also benefiting from acceleration in the Foodservice business as well as sustained demand for retail and deli products. That being said, the food company is facing challenges related to higher costs.

Let’s discuss further.

What’s Working for Hormel Foods?

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.

Several other companies in the food space have been benefiting from their focus on undertaking strategic acquisitions. This has been working well for players like Tyson Foods Inc. (TSN - Free Report) and The Hershey Company (HSY - Free Report) .

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.

Is All Rosy For Hormel Foods?

During the third quarter of fiscal 2021, Hormel Foods encountered major inflationary pressure in most areas like raw materials, packaging, freight, labor and many other inputs. The company saw significant inflation in pork input costs. Management commented that the labor environment remained difficult during the quarter.

Hormel Foods intends to combat inflationary pressure with strategic pricing actions. However, pricing actions are likely to lag the markets, which in turn, will move profits to subsequent quarters.