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Hormel Foods (HRL) Gains From Capacity Expansion, Costs High

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Hormel Foods Corporation (HRL - Free Report) is benefiting from its strategic growth initiatives, including capacity-expansion efforts. The company benefits from brand strength, improved foodservice business and higher pricing. Its efforts to enhance the supply chain are yielding. These factors boosted second-quarter fiscal 2022 results, with the top and the bottom line increasing year over year and beating the Zacks Consensus Estimate.

Given its first-half performance and current anticipation for the full year, management is confident about delivering the targeted net sales growth owing to the strong demand for its brands in all three channels, supply-chain enhancements, pricing actions and investments in capacities in fiscal 2022. HRL projects fiscal 2022 net sales in the range of $11.7-$12.5 billion. The company posted net sales of $11.4 billion in fiscal 2022.

That being said, Hormel Foods has been battling higher costs. Let’s delve deeper.

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What’s Working Well for Hormel Foods?

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 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.

The Zacks Rank #3 (Hold) company intends to strengthen its business on the back of strategic acquisitions. On Jun 7, 2021, Hormel Foods acquired Planters snacking portfolio from The Kraft Heinz Company (KHC - Free Report) . 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.

Several other companies in the food space are benefiting from acquisitions like Kraft Heinz, Post Holdings, Inc. (POST - Free Report) and The Hershey Company (HSY - Free Report) . In April 2022, Kraft Heinz acquired a majority stake in a Brazil-based condiments and sauces company — Companhia Hemmer Indústria e Comércio ("Hemmer"). The buyout will widen Kraft Heinz's International Taste Elevation platform and enhance its presence across emerging markets. In January 2022, KHC acquired an 85% stake in Germany-based Just Spices GmbH (“Just Spices”). The buyout enhances its direct-to-consumer operations and go-to-market expansion.

During the second quarter of fiscal 2022, Post Holdings’ top line included $102.1 million in net sales from acquisitions. These acquisitions include the Private label ready-to-eat (PL RTE) cereal business, the Egg Beaters liquid egg brand, the Almark Foods business and related assets and the Peter Pan nut butter brand. On Apr 5, 2022, Post Holdings acquired Lacka Foods Limited. On Feb 1, 2021, POST acquired Almark Foods, which is renowned for its hard-cooked and deviled egg products and provides conventional, organic and cage-free products.

Hershey is undertaking buyouts to augment portfolio strength and boost revenues. In December 2021, Hershey acquired Dot’s Pretzels LLC — the owner of Dot’s Homestyle Pretzels — a leading brand in the pretzel category. The addition of Dot’s Pretzels is a perfect match for Hershey’s growing salty snacking portfolio. The company also acquired Pretzels Inc. from an affiliate of Peak Rock Capital. The acquisition expands HSY’s snacking and production capabilities.

Is All Rosy for Hormel Foods?

Hormel Foods is grappling with escalated SG&A expenses. 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.

The company has been battling a drab gross margin for a while. During the quarter, the company’s gross profit margin came in at 17.9%, down from 18.3% reported in the year-ago period. 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 aforementioned upsides are likely to offer some respite. HRL’s stock has dropped 3.2% in the past six months, outpacing the industry’s 8.4% decline.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.