The Times Are Changing For Hormel Foods
Hormel Foods Corporation (NYSE: HRL) released its Q3 results and proved definitively the COVID-induced bump in business is over. Now, the company is still reporting revenue growth but there is a factor to be aware of. While revenue is still growing its more to do with price increases meant to offset inflation than anything else. Worse, the company is experiencing margin pressures that price increases have, so far, not been able to mitigate. The bottom line is that Hormel may be on the brink of a major earnings reset that will weigh on shares prices moving forward. The good news is that this high-quality dividend grower which has been one of the highest valued consumer staples stocks is going on sale.
Hormel Foods Corporation Beats And Guides Higher
Hormel Foods Corporation had a decent Q2 period in which revenue grew 20.2% from last year. This is on top of a 4% increase in sales last year that leaves revenue up about 24% in the two-year stack. The $2.68 in consolidated revenue is also 475 basis points better than expected but the internals leave a lot to be desired. While organic sales are up 14% over last year this is due to pricing increases because organic volume sales are down -2.0%. Revenue was also impacted by the addition of Planters nut business to the portfolio.
"We saw significant inflationary pressure in almost all areas of our business, including raw materials, packaging, freight, labor and many other inputs during the quarter," Snee said. "We have implemented pricing actions across virtually every brand, which has been our main lever to offset these inflationary pressures. In addition, our experienced management team is taking numerous other strategic actions to offset cost increases, including optimizing promotional activity, improving product mix and rationalizing less efficient products in our portfolio,” says Jim Snee, CEO of Hormel Foods.
On a segment basis, the company reports positive sales improvement in all four operating segments and sales channels. The US Foodservice channel saw the largest increase at 45% and this is no surprise. The Foodservice segment was among the hardest hit during the pandemic and is now supported by reopening tailwinds. The International segment grew 36% while US Deli and Retail grew 12% and 9%. All four segments saw double-digit 2-year growth as well.
Moving down the report is where the details get most alarming. The company reported a 330 basis point decline in operating margin despite aggressive pricing increases. The pricing increases may not have taken full effect, and there are more on the way, but this news does not bode well for earnings and is already have an impact on both. The company reported GAAP EPS below the consensus and adjusted EPS that was only in line despite the revenue strength. As for guidance, the company raised its guidance for revenue growth by 780 basis points at the low end of the range but indicated further margin pressure ahead. The company is expecting EPS in the range of $1.65 to $.69 compared to prior guidance of $1.70 to $1.82 and the consensus target of $1.73.
The Technical Outlook: The Market Loses Interest In Hormel
If the analyst’s activity is any indication the market is losing or has already lost, interest in Hormel. According to Pricetargets.com analyst tracking tools, there has been no significant analyst activity since January and what there is, isn’t good. The company has steadily lost coverage over the last nine months which helps explain price action. Now, in the wake of the Q3 report, shares of the stock are nearly 5.0% and indicated lower. There is a chance for support at a major up trendline but there is a risk of the trend being broken. If Hormel can maintain support at this level the long-term uptrend may resume. If not, this stock could shed another 5% to 25%.
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