Hormel Foods Corporation HRL posted second-quarter fiscal 2019 results, wherein both top and bottom lines increased year over year and the latter marked its fourth-successive beat. However, sales missed the Zacks Consensus Estimate for the sixth straight time. Also, the company struggled with input cost inflation, which along with expectations of volatile pork prices led to a lowered fiscal 2019 view.
Clearly, this was a letdown for investors. Hence, shares of the company lost 2.6% during the pre-market trading session. Moreover, this Zacks Rank #4 (Sell) stock has declined 7.2% in the past three months against the industry 's growth of 14.4%.
The company concluded the divestiture of CytoSport business to PepsiCo PEP last month. The transaction was valued at nearly $465 million.
Quarter in Detail
Quarterly earnings of 46 cents per share came a penny ahead of the Zacks Consensus Estimate of 45 cents. Further, the bottom line rose 4.5% from 44 cents reported in the year-ago period. This can be attributable to improved sales, lower interest expenses and reduced tax rate. Effective tax rate during the quarter was 11.1% compared with 20% in the year-ago quarter.
Net sales came in at $2,344.7 million, which missed the Zacks Consensus Estimate of $2,368 million. Nevertheless, the top line inched up 0.6% year over year backed by sales growth in three out of four segments.
Hormel Foods witnessed roughly 1% advancement in volumes. The upside can be mainly attributed to improved volumes in the Grocery Products segment.
Sales in the Grocery Products unit climbed 2.2% to $635.3 million, owing to gains from Wholly Guacamole dips, Herdez salsas and sauces, and Skippy peanut butter. These were countered by reduced sales from CytoSport products. Volumes in this unit improved 3%. Further, operating profit rallied 12.1% to $104.5 million.
Revenues in the Jennie-O Turkey Store segment moved up 0.5% to $305.3 million, as gains from foodservice and whole-bird sales were countered by retail declines. Volumes in the segment grew 2%. Operating profit slumped 45% to $17.7 million. This was accountable to greater-than-expected plant startup costs, elevated feed costs and soft retail sales.
The company's Refrigerated Foods segment generated sales of $ 1,257.9 million, up roughly 1% year over year. The upside was fueled by foodservice sales of products like Hormel Bacon 1, Hormel Fire Braised and Austin Blues as well as retail sales of Hormel pepperoni, Hormel Black Label, Hormel prepared foods and Hormel Natural Choice products. Further, volumes in the unit remained flat. Operating profit fell 5.3% to $158.1 million, owing to a decline in commodity profits and escalated operational costs.
International & Other revenues were down 8.6% to nearly $146.3 million. The downside can be blamed on continued tariff impacts on fresh pork exports. Further, volumes in the unit declined 7%. Operating profit decreased 31.3% to nearly $14.3 million on account of tariffs and increased freight costs.
Selling, general and administrative expenses totaled $170.1 million, down from $204.5 million in the year-ago quarter. This can be partly accountable to reduced selling costs.
Operating income came in at $312.4 million, up 3.5%. Operating margin increased 40 bps to 13.3%.
Balance Sheet/Cash Flow
The company ended the quarter with cash and cash equivalents of $639.3 million and long-term debt of $250 million (excluding current maturities).
In the first six months of fiscal 2019, Hormel Foods generated cash of $365.6 million from operating activities. Capital expenditure summed $48 million during the second quarter. The company expects capital expenditures to be roughly $310 million for fiscal 2019.
During the quarter, the company repurchased 0.6 million shares for nearly $23 million. On May 15, the company paid dividend at an annual rate of 84 cents per share.
A day prior to the release, Hormel Foods declared quarterly dividend of 21 cents a share, payable on Aug 15, 2019, to shareholders of record as on Jul 15.
While the company witnessed record sales, results were hampered by input cost inflation. This in turn stemmed from the African swine fever in China, which weighed on the hog and pork markets during the second quarter. Though the company has announced strong pricing actions across all its segments, except Jennie-O Turkey Store, these actions are likely to lag the input cost inflation. Further, the company reduced its expectations for the Jennie-O Turkey Store segment, as it continues to invest in the segment to regain retail distribution.
These factors along with expectations of volatile pork prices in the domestic market compelled management to lower its fiscal 2019 guidance.
Hormel Foods now expects net sales of $9.5-$10 billion compared with the previous outlook of $9.7-$10.2 billion. Further, it now envisions earnings of $1.71-1.85 per share, down from the old guidance of $1.77-$1.91.
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