Consumer spending is on the rise, as oil prices have stabilized and income has increased. Also, lower unemployment rates have resulted in higher overall retail demand. The same does apply to food. However, there are some categories of food that have registered higher prices. For instance, prices of green coffee as well as that of beef are on the rise. Hence, people have shifted to other cheaper options in order to maintain their budgets.
Increase in beef prices has resulted in a lot of problems for meat retailers such as the decline in demand and shrinkage of margins as well as the bottom line. Hormel Foods (HRL, Financial) is an apt example here. Hormel Foods managed to register a strong quarter despite all these problems. Its numbers were ahead of the Street’s expectations, sending its share higher. Let’s discuss.
The details of the quarter
Revenue for the quarter surged 9.5%, to $2.54 billion, over last year. This was in line with the analysts’ expectations and was driven by an increase in volume of 3%. Although the increase in beef prices affected beef sales, people shifted to processed pork products. Thus, demand for pork increased. The price of beef has been increasing because of the outbreak of swine flu that killed millions of pigs last year, resulting in shortage of supply and higher prices.
Higher sales of pork resulted in a growth of 9.4% of the core refrigerated food segment, clocking in at $1.2 billion. Another driver for the revenue growth was higher sales of bacon and sausages. Further, even Jennie-O-Turkey segment surged 11%, driven by the 7 % jump in segment volumes. However, demand for grocery products was low. Grocery products were down 3% as higher meat costs resulted in lower demand, which affected volumes.
The bottom line, however, was below the estimates. Earnings jumped to $0.63 per share from $0.58 per share in the previous year. But this was slightly below the estimate of $0.64 per share. However, the most remarkable part was the expansion of the margins. Gross margin expanded 10 basis points to 16.6%, despite the increases in meat prices.
Some strengths to consider
The meat producer made two new acquisitions recently, which has strengthened its business. It acquired SKIPPY peanut butter business in January 2013 and CytoSport Holdings, Muscle Milk maker, in August this year. These two buyouts helped the retailer boost its top line further.
The retailer also updated its guidance, which was below the Street’s expectations. It expects earnings to be in the range of $2.45 to $2.55, whereas analysts are expecting it to be at $2.59 per share. Further, the company expects sales to grow by 5%, whereas the analysts’ estimate is at 6%.
The bottom line
Thus, despite posting a good quarter, the guidance of the company disheartened the investors. Nonetheless, there are many positive to look for. Firstly, pork and beef prices are expected to normalize in the coming months. This should help the retailer grow its earnings as well as to bring back demand for beef. Also, it has raised its dividend by 25%, which delighted the investors. These factors, coupled with the benefits of the latest buyouts, make me go long about this company.
