Hormel Foods’ balanced business model helps it overcome hit from avian flu

By Elizabeth Crawford

- Last updated on GMT

Hormel Foods’ balanced business model helps it overcome avian flu hit

Related tags Influenza Avian influenza

Hormel Foods “balanced business model” allowed it to raise its profit outlook by taking advantage of lower pork prices to offset sales losses in its turkey operation related to the avian flu, executives said Aug. 19.

The Austin, Minn.-based firm reported earnings per share for its third quarter are up 10% from the same period last year to 56 cents per share. The unexpected increase prompted the company to boost its full year expectations to $2.57-$2.63 from a previously expected $2.50-$2.60 per share, CEO Jeffery Ettinger told analysts during the firm’s quarterly call.

The increased profit was possible despite an overall 4% drop in sales for the quarter to $2.2 million in part because the cost of pork was down almost 40% in July from the previous year, Ettinger said, adding strong sales of value-added retail and food service business also helped buy profits.

In particular, he said, retail sales were strong for Hormel pepperoni, Gatherings party trays, Natural Choice deli means and Fire Braised meats.

CFO Jody Feragen added that the pepperoni and party tray businesses are not as sensitive to changes in pork supply, the current abundance and low price of which has caused bacon and ham prices to drop.

Nonetheless, she said, “we’ve been able to maintain a nice margin profile”​ for those products.

Other products help boost profits

Increased sales of Skippy peanut butter products, Hormel chili and Wholly Guacamole also contributed by driving up profits 57% for the firm’s grocery segment, which also saw an 8% sales increase.

“Wholly Guacamole minis in a single-serve container have been a key driver to the brand’s growth this past year,”​ noted Ettinger, adding, “They squarely meet consumers’ desires for portable, better-for-you snacking options.”

The launch of Muscle Milk Pro Series also helped the company’s specialty food segment see a 79% increase in operating profits and a 31% increase in segment sales, Ettinger said.

“Innovation is a top priority for our CytoSport business and we look forward to the launch of some great new items currently in the pipeline for our Muscle Milk brand,”​ he added.

Turkey segment struggles

Gains in these areas help offset the significant hit Hormel took from the avian flu, which struck more than 50 farms supplying turkey to its Jennie-O Turkey Store segment.

During the third quarter, the segment’s profits fell 45% and sales dropped 12% due mainly to large volume shortfalls related to the destruction of flocks hit by the avian flu earlier this year.

“We have now repopulated approximately two-thirds of the farms previously impacted and we expect to complete the repopulation process during the fourth quarter,”​ Ettinger said.

Despite these improvements, Hormel estimates the segment’s fourth quarter sales still will be down about 15% from last year.

Ettinger also acknowledged “at least a little bit of risk”​ from another bout of the flu as wild birds migrate south.

“We’ve heard a … theory as to perhaps birds go south faster than they come north and they may not linger as long in the areas,”​ which could reduce the risk of contamination, he said.

But, he added, “it’s just such a wild card …. It could hit other parts of the country, it could hit another time of the year, it could go away, it could come back in a smaller manner.”

Given this uncertainty, “we’re trying to be ready for any contingency,”​ he said. “Even if nothing occurs, however … we’re expecting volume struggles even in the first half of next year until we cycle through this.”

In light of these ongoing challenges and successes, Ettinger said, “I’m proud of our experienced team as we have demonstrated our ability to navigate an unprecedented raw material supply challenge and still be on track to deliver another double-digit increase in earnings in fiscal 2015.”

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