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Hormel Foods (HRL) Benefits From Brand Strength, Hurt by Costs

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Hormel Foods Corporation (HRL - Free Report) is benefiting from its focus on capacity-expansion endeavors, including strategic buyouts. The renowned food company’s solid brand portfolio, improved foodservice business and higher pricing are vital drivers. Such upsides were visible in its second-quarter fiscal 2022 results, with the top and the bottom line increasing year over year and beating the Zacks Consensus Estimate. Yet, Hormel Foods is not immune to the inflationary environment.

Let’s discuss this further.

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Robust Q2 Performance

During the second quarter of fiscal 2022, Hormel Foods’ earnings of 48 cents per share increased 14%. Net sales in the quarter were $3,096.6 million, rising 19%. Organic net sales were up 10%. Channel-wise, net sales across U.S. Retail and U.S. Foodservice increased 15% and 32% year over year, respectively. Demand remained high in U.S. channels and the company gained from its pricing efforts to counter inflation and gains from the Planters snacks nuts business. Hormel Foods benefited from its balanced business model, robust brands and efficient management team. Brand strength, particularly in Columbus, WHOLLY, Applegate, Hormel Gatherings, SPAM and Planters, to name a few, aided results. The company has been making continued investments in the e-commerce channel, which are boosting growth.

Hormel Foods remains confident about delivering the targeted net sales growth due to the strong demand for its brands in all three channels, supply-chain enhancements, pricing actions and investments in capacities. HRL projects fiscal 2022 net sales in the $11.7-$12.5 billion range. The company posted net sales of $11.4 billion in fiscal 2022.

Capacity Expansion Endeavors

The Zacks Rank #3 (Hold) company intends to strengthen its business on the back of strategic acquisitions. On Jun 7, 2021, the company acquired Planters snacking portfolio. During second-quarter fiscal 2022, management concluded the integration of all the aspects of the Planters snack nuts business, which continues to perform at the top end of the company’s expectations. The company acquired a Texas-based pit-smoked meats company, Sadler's Smokehouse (March 2020). The buyout is in sync with Hormel Foods’ initiatives to strengthen its position in the foodservice space.

Hormel Foods is on track with strategic investments for boosting capacity. The company incurred a capital expenditure of $78 million in the fiscal second quarter. For fiscal 2022, management expects to incur capital expenditures of $310 million. In its last earnings call, management highlighted that it gained from new capacity, including pepperoni expansion at Papillion Foods plant in Nebraska and raw bacon investment across its plant in Austin. The company is also advancing in its transformation actions in the Jennie-O Turkey Store segment. Hormel Foods closed the Benson Avenue production facility in the second quarter of fiscal 2022 and transferred nearly 200 workers to its newer and bigger manufacturing facility in Willmar, MN.

Hurdles on Way

Hormel Foods is battling a drab gross margin for a while. During the second quarter of fiscal 2022, the company’s gross profit margin came in at 17.9%, down from 18.3% reported in the year-ago quarter. In its last earnings call, management highlighted that it continues to battle significant input cost volatility and inflation. The company has witnessed a rise in all inputs like raw materials, packaging and supplies, freight and logistics and labor.

The company is grappling with escalated SG&A expenses for a while. During the second quarter of fiscal 2022, SG&A expenses rose to $224.7 million from around the $200 million reported in the year-ago quarter. SG&A expenses increased 12% due to the addition of the Planter snack nuts business and increased advertising investments.

That being said, the aforementioned upsides will likely help Hormel Foods stay afloat amid such hurdles.

HRL’s stock has dropped 0.1% in the past year compared with the industry’s 2.5% decline.

Top 3 Food Bets

Some better-ranked stocks are Sysco Corporation (SYY - Free Report) , United Natural Foods (UNFI - Free Report) and Campbell Soup (CPB - Free Report) .

Sysco, which markets and distributes various food and related products, sports a Zacks Rank #1 (Strong Buy). SYY has a trailing four-quarter earnings surprise of 9.1%, on average. You can see the complete list of today’s Zacks #1 Rank stocks here.

The Zacks Consensus Estimate for Sysco’s current financial year sales and earnings per share (EPS) suggests growth of 32.5% and 124.3%, respectively, from the year-ago reported number.

United Natural Foods distributes natural, organic, specialty, produce and conventional grocery and non-food products. UNFI currently sports a Zacks Rank #1.

The Zacks Consensus Estimate for UNFI’s current financial year sales and EPS suggests growth of 7.2% and 3.6%, respectively, from the year-ago period’s reported figures. United Natural Foods has a trailing four-quarter earnings surprise of 29.9%, on average.

Campbell Soup, which manufactures and markets food and beverage products, currently carries a Zacks Rank #2 (Buy). Campbell Soup has a trailing four-quarter earnings surprise of 10.8%, on average.

The Zacks Consensus Estimate for CPB’s current financial-year sales suggests growth of 0.5% from the year-ago reported figure.