Hormel Foods Corp. is taking steps to mitigate the impact of higher commodity costs during its 2013 fiscal year. With much of the company’s business focused on value and value-added beef, pork and turkey products, the company is attempting to limit its exposure to higher feed costs.
“Moving into fiscal 2013, we intend to again grow both sales and earnings,” said Jeffrey M. Ettinger, chairman, president and chief executive officer. “We expect our Refrigerated Foods, Grocery Products, Specialty Foods and International segments to contribute to the earnings growth. We expect our Jennie-O Turkey Store segment to register an earnings decline due to higher grain costs and tougher comparisons.
“Headwinds to our outlook for 2013 include higher grain costs and volatile protein costs and processing margins. We plan on reducing our harvest levels in both our Jennie-O Turkey Store and Refrigerated Foods segments by 1% to 2% in order to mitigate our exposure to these higher commodity costs. We will also continue to take strategic and modest price increases where we need them.
“On the positive side, we continue to enjoy solid top-line momentum with a significant number of our important value-added franchises. For example, the continued strong sales growth of our Jennie-O Turkey Store fresh tray pack, turkey burgers and now turkey bacon should continue in 2013, fueled by our Make The Switch ad campaign and the trend toward eating more nutritious products.”
Mr. Ettinger’s comments were made during a conference call with financial analysts on Nov. 20 to discuss the company’s fourth-quarter and fiscal 2012 results. In fiscal 2013, he said the company expects its earnings to be in the range of $1.90 to $2 per share.
Grain cost inflation during fiscal 2013 is estimated to be in the range of $50 million to $100 million, Mr. Ettinger said.
“It depends some on hedged positions and other things going on,” he said. “But clearly, when you look at what the core grains have gone up post-drought, it’s certainly a significant amount of money.”
He noted the possibility of cost increases related to the beef and pork products the company processes may occur in the second half of the year.
“They are not here yet, so we are not announcing current pricing actions on those items,” he said. “But we are going to watch them closely.
“And so, that may well be something that the team has to have as part of their reactions during the second half of the year. But we have been taking pricing in past years here. And by and large, with our No. 1, No. 2 position brands in most of our categories, we have been able to take them and sustaining our share positions.”
With regards to Hormel’s Jennie-O business, Mr. Ettinger noted that as it has evolved over the years the company has shifted its product mix in an effort to create more consistent opportunities.
“We are in fewer categories and we are relying less on the categories where there’s seven or eight different competitors and the products are relatively non-differentiated,” he said. “And instead, we are pushing it into innovative items, items where our brand really plays a major role. And so that has been the bigger upgrade at Jennie-O.”
He envisions a similar scenario playing out for the company’s beef and pork product lines.
“In the basic pork business there’s a lot of the commodity elements that pull that (operating margins) down somewhat,” he said. “Some of the more market-based products such as fresh pork or raw bacon are also not huge margin contributors. So we do believe that theme, over time, as they continue to develop and move themselves up that value ladder in the food service and meat products area, ought to be able to migrate those margins upward. And we think that's one of the stronger opportunities, long-term, for the company.”
Cost inflation is not the only concern facing Hormel Foods. The slow recovery of the food service category also has the potential to affect company performance. When asked to express his opinion of the food service category, Mr. Ettinger said it is “sputtering.”
“…but that’s more negative than I want to really get across, because it’s not like it’s not moving forward,” he said. “But it does seem like every time the industry gets a couple of months where, boy, okay, they seem to have turned the corner and it’s solidly doing well, either they get hit with a gas price increase or a food cost increase or some sort of change in consumer behavior. And so it’s not just a steady, robust environment out there.
“Overall, though, it’s certainly better than the early part of the recession. I think the industry would say overall that they are seeing positive trends.”
For fiscal 2012 that ended Oct. 28, Hormel Foods recorded net income of $500,050,000, equal to $1.90 per share on the common stock, an increase compared with the previous fiscal year when net income was $474,195,000, or $1.78 per share.
Sales for the year were $8,230,670,000, up 4% from $7,895,089,000 for the previous year.
