Hormel warns of lower inventory, stresses maintaining supply chain, production efficiency is ‘critical’

“Due to the significant demand for our products in the third quarter, and limiting factors on production of key brands, inventory levels were unseasonably low as we began the fourth quarter,” Hormel CFO and executive vice president Jim Sheehan told analysts during the company’s third quarter earnings call Aug. 25. He estimated that finished good inventory levels currently are about 24% lower now than last year with the grocery products and refrigerated food segments most impacted by the lower levels. He explained that historically the company builds inventory levels during the third quarter in preparation for increased seasonal demand around the holidays in the fourth quarter, but because of heightened consumer demand in the second and third quarters related to the coronavirus pandemic, the company has not been able to build up its inventory. Indeed, Hormel CEO and president Jim Snee said, Hormel has burned through its “buffer” inventory with which it began 2020 in order to meet increased demand during the pandemic despite some “plant pauses and more significant disruptions to the supply chain” during the early days of the pandemic. “As we head into the fourth quarter, it’s going to be very important – paramount, if you will – that we keep our supply chain operational … and our production efficiencies are where they need to be” to meet continued increased demand for at-home products, he said. Snee was quick to reassure analysts that the company is “not going to put any of our business or our shelf space at risk,” by catching retailers off guard with short orders. “We’re able to meet and maintain our shelf space with our customers. … We’re in a constant dialogue with retailers in terms of making sure that where we’re meeting their needs, they understand what our situation,” he added. Snee also noted that while Hormel does not have the comfort of the inventory buffer it had coming into the year, many of the struggles that caused it to burn through that buffer are less of a threat now than during the first part of the year. “We’re not seeing the level of outbreaks of COVID cases” as occurred at the start of the pandemic and the company has not had to pause production since the start of the fourth quarter, he said. “Without compromising employee safety, our supply chain team is working to find solutions to increase production through continuous improvement, further internal production capacity, and by working with our trusted co-manufacturing partners,” Snee said. He added that the company has also expanded employee safety measures, including expanding automated temperature screenings, adding more staggered production shifts and increasing training on COVID-19 best practices. “We partnered with the CDC to review our efforts related to COVID-19 and how we have implemented guidance from the CDC and OSHA at one of our production facilities. Their review included a multiple day visit to the facility, along with surveying employees regarding their knowledge, attitude, and practices on COVID-19. I am pleased with their findings, namely that we had implemented virtually all recommended controls to prevent transmission of COVID-19,” Snee said. He added: “ The survey of our diverse team found that more than 90% of our employees have a comprehensive understanding of prevention techniques and what to do if they get sick with the virus. In addition, over 98% of our team members surveyed reported that they wore a facial covering when out in public. These actions are making a difference to stop the spread of COVID-19 in our communities.” The company’s efforts to manage COVID-19, including lower volumes, lower overhead recovery and increased expenses related to personal protective equipment and other employee safety measures has eaten slightly into the company’s margins (down to 10.5% from 11.2% last year) and profits (down 3% from last year), but Snee says that the company’s margins remain “at the top of the industry.” Ultimately, he said, Hormel saw record net sales of $2.4b during third quarter, up 4% from the same time last year. In grocery products specifically, volume is up 6%, net sales increased 7% and segment profit rose 36%. Refrigerated foods also saw an 8% increase in volume, 5% increase in net sales and 11% drop in segment profit. Innovation remains a top priority While managing inventory levels of in-demand brands and products remains a top priority for Hormel, so too is innovation, Snee said. “In the midst of everything else that is going on, we haven’t lost sight of the fact that innovation is part of our lifeblood and its something that we need to continue to deliver to drive the company forward,” he said, adding “our team has just done an amazing job responding.” As such, the company is on track to meet its 15% goal for product innovation with the recent launch of several new Skippy products, including a Skippy Peanut Butter Blended with Plant Protein, a Skippy No Sugar Added and Skippy Squeeze pouch, which recently won a Food Network magazine award for smartest new packaging. Snee noted the new launches “are seeing early success,” and have helped drive a “resurgence of demand in Skippy,” which he said “has thrived and outpaced the competition” during the pandemic. Beyond Skippy, the company continues to innovate how it offers deli meats by placing an emphasis on grab-and-go offerings, pre-packaged and pre-sliced selections and repositioning its Hormel Gatherings Party Trays to a more family-oriented option rather than focusing on social gatherings, which remain limited in may locations. Looking forward, Snee noted Hormel has a “very strong” innovation pipeline for the fall.