Hormel Foods (HRL) Stock Down 5% Despite Q3 Earnings Beat
Hormel Foods Corporation HRL posted third-quarter fiscal 2018 results, wherein both top and bottom lines improved year over year. However, it looks like the company’s lower-than-expected sales and trimmed sales guidance weighed on investors’ sentiments.
Incidentally, shares of this Zacks Rank #4 (Sell) company are down 4.6% during the pre-market trading session. This might reflect on the company’s stock performance. Notably, Hormel Foods has gained 9.2% in the past three months, against the industry’s drop of 2.6%.
Q3 in Detail
Quarterly earnings of 39 cents per share came a penny ahead of the Zacks Consensus Estimate. Moreover, the bottom line increased 15% year over year. The upside was backed by higher sales and benefits from tax reforms. Incidentally, effective tax rate during the quarter was 18.4% compared with 34.3% in the same period last year.
Net sales came in at $2,359.1 million, which missed the Zacks Consensus Estimate of $2,404 million. However, the top line advanced nearly 7% year over year, which was backed by strength in Grocery Products and International divisions. Also, Hormel Foods’ witnessed a 5% increase in volumes. Management stated that it is benefitting from its increased advertisement investments, evident from improvements in brands like Skippy, Applegate, Natural Choice, Jennie-O, Herdez and Wholly Guacamole. Also, its recent buyouts of Columbus Craft Meats, Fontanini, and Ceratti are yielding.
On an organic basis, sales remained flat, while volumes rose 1% year over year.
Grocery Products’ sales remained flat at $617.7 million as gains from Wholly Guacamole dips, Herdez salsas and sauces, and Skippy peanut butter were countered by lower sales at CytoSport and the company’s contract manufacturing business.
Revenues at the Jennie-O Turkey Store segment jumped nearly 8% to $398.1 million on the back of higher whole bird and commodity sales.
The company’s Refrigerated Foods segment generated sales of $1,195.8 million, up roughly 10% year over year. The upside was fueled by contributions from Columbus and Fontanini buyouts along with solid foodservice sales from Austin Blues smoked barbeque products. Retail sales growth of Hormel Natural Choice and Applegate products also drove segment sales. However, sales dropped 3% on an organic basis owing to soft hog harvest volumes.
International & Other revenues were up about 11% to nearly $147.6 million. Sales growth was aided by Ceratti’s inclusion, increased export sales of SPAM luncheon meat and Skippy peanut butter, and solid China multinational business sales. However, higher tariffs in core markets weighed on fresh pork export volumes, sales and profits.
In the third quarter, Hormel Foods’ cost of sales went up 8.3% to approximately $1,900 million. Gross margin contracted nearly 100 basis points (bps) to 19.5%.
Selling, general and administrative expenses totaled $210.7 million, up from $176.7 million recorded in the same period last fiscal. This was accountable to increased advertising investments and costs related to acquisitions.
The company’s operating margin came in at 11.1%, shrinking 160 bps year over year.
Balance Sheet/Cash Flow
Hormel Foods ended the quarter with cash and cash equivalents of $269 million and long-term debt of $624.8 million (excluding current maturities).
In the first three quarters of fiscal 2018, Hormel Foods generated cash of $743.2 million from operating activities. Capital expenditure summed $103 million in the third quarter compared with $42 million incurred in the prior-year period. The company expects capital expenditures to be roughly $400 million for fiscal 2018.
Year to date, the company repurchased 1.3 million shares for nearly $45 million. Also, Hormel Foods continued with its practice of paying dividends in the third quarter that marked its 90th year of consistent dividend payment.
The company expects to gain from its sturdy brand portfolio, innovation and buyouts. These factors are expected to help the company offset hurdles related to freight costs, adverse currency movements and volatile commodity prices.
Further, Hormel Foods recently announced the sale of its Fremont processing facility to WholeStone Farms, which is expected to conclude in December 2018. Management’s expectations regarding the dynamics of the pork industry in the long run led the company to make this move. Though Hormel Foods remains exposed to tariff volatility and other industry headwinds, management remains confident about delivering its previously guided earnings in fiscal 2018.
That said, the company reiterated its earnings per share outlook for the fiscal. The company continues to envision earnings per share in the range of $1.81-$1.95. Advertising investments are expected to increase roughly 20% year over year. Effective tax rate is anticipated to be 15-16%.
However, Hormel Foods lowered its sales outlook from $9.70-$10.10 billion to $9.40-$9.60 billion.
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