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Hormel Foods Boasts Strong Brands, Input Costs a Worry

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Hormel Foods Corporation HRL is struggling with rising input costs as well as troubles across the Grocery and Turkey segments. Nevertheless, a sturdy brand portfolio, bolstered by prudent buyouts and innovations, has helped the company stay afloat. In fact, the presence of strong brands is fueling growth in the Refrigerated Foods unit. Let’s delve deeper.

Robust Brands Aid Business Growth

Strong demand for popular brands like Applegate, Natural Choice, SPAM, Muscle Milk and Wholly Guacamole dips have been augmenting the company’s revenue prospects. Well-chalked buyouts have further strengthened the company’s portfolio. To this end, the Columbus and Fontanini buyouts is driving performance in the Refrigerated Foods segment. Notably, through the inclusion of Columbus, the company has been able to develop the new Hormel deli solutions division that is included within refrigerated foods and is catering to retailer needs. Also, the Ceratti acquisition is boosting growth in the International segment.

Markedly, the Refrigerated Foods category is steadily growing on the back of strong brands and effective strategies. During third-quarter fiscal 2019, the unit generated sales of $1,301.1 million, up roughly 1% year over year. The upside was fueled by products like Hormel Bacon 1, Hormel Fire Braised and Old Smokehouse as well as retail sales of Hormel Black Label and Columbus. We expect the Refrigerated Foods segment to continue benefiting from its value-added growth, effective pricing and innovation.

Additionally, the company focuses on launching products to meet consumers’ changing preferences. It also adheres to strategic promotional investments to support growth of its brands.

Factors Hurting the Company

Weakness in the company’s Grocery unit has been a hurdle for the company. In fact, the company’s third-quarter fiscal 2019 sales declined nearly 3% year over year. The downside was largely caused by dismal results in the Grocery segment, stemming from the divestiture of CytoSport and declines in Skippy. Moreover, retail declines in the turkey market have been adversely impacting the company’s Jennie-O Turkey Store segment.

Additionally, challenges in the pork market have been a limitation for the company for a while. Global trade uncertainty and cold storage reserves in China along with other factors have been exerting pressure on the pork market. Markedly, higher tariffs and the African swine fever led to export volume declines at Hormel Foods’ International division during the third quarter. In fact, the African swine fever in China led to an overall increase in input costs during the said quarter. Management expects costs of main inputs to remain high in the fourth quarter, which is a threat for the bottom line. Other meat products companies such as Tyson Foods TSN, Pilgrim's Pride (PPC - Free Report) and Sanderson Farms SAFM are also struggling with rising input costs.

Nevertheless, we expect Hormel Foods’ prudent pricing actions to help cushion the adverse impacts of such costs. Further, we expect that the company’s well-chalked portfolio will continue to yield and counter the aforementioned hurdles

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