Hormel Foods (HRL): Here are three noteworthy points from the food company’s Q2 report

Shares of Hormel Foods Corporation (NYSE: HRL) stayed in red territory on Friday. The stock has dropped 6% year-to-date and 7% over the past 12 months. The company posted better-than-expected results for its second quarter of 2022 but narrowed its earnings guidance for the full year due to a challenging macroeconomic environment. Here are a few noteworthy points from its recent quarterly report:

Better-than-expected results

Hormel’s net sales in Q2 rose 19% year-over-year to $3.1 billion, exceeding expectations. Organic net sales were up 10%. The company witnessed strong consumer and operator demand for its major brands and investments in its diversified product portfolio generated yields.

Hormel saw 15% growth from its retail businesses thanks to strong demand for brands such as WHOLLY, SKIPPY and SPAM. The foodservice channel recorded sales growth of 32% YoY. The company witnessed substantial gains in the fast-growing convenience store channel as growth in the Planters and Corn Nuts businesses helped broaden placements of other products.

Hormel witnessed double-digit sales growth across all its segments barring International & Other. The momentum was driven by strength in foodservice businesses and retail products. The International segment was hurt by export logistics headwinds and lower commodity sales.

Hormel delivered earnings of $0.48 in Q2, which was up 14% year-over-year and ahead of estimates.

Inflation and margins

Hormel continues to face headwinds from input cost volatility and inflation. The company saw increases across all its inputs such as raw materials, packaging and supplies, labor, and freight and logistics. Protein and feed costs also remained at high levels. In Q2, gross profit margin stood at 17.9% compared to 18.3% last year. Operating margins were 10.8% compared to 11.1% last year.

Both gross profit margin and operating margin improved on a sequential basis from 17.7% and 10.5%, respectively in Q1. This indicates that the efforts the company is making to mitigate inflation are paying off.

Outlook

Hormel reaffirmed its sales guidance for the full year of 2022 based on strong demand for its brands, improvements in supply chain, strategic pricing actions and investments in capacity. Sales are expected to range between $11.7-12.5 billion.

The company narrowed its earnings guidance for the year taking into account the impacts from the highly pathogenic avian influenza (HPAI) on turkey supply and external factors affecting its International & Other segment, including export logistics challenges and lockdowns in China. EPS is now estimated to be $1.87-1.97 versus the previous outlook of $1.87-2.03.   

Hormel expects Refrigerated Foods to benefit from strength in the foodservice businesses and strong demand for retail products. The Grocery Products division is expected to face inflationary pressures until pricing actions take effect in the fourth quarter.

Sales volumes in the Jennie-O Turkey segment are projected to fall around 30% in the second half of the year due to supply gaps and the uncertainty related to HPAI. The International & Other segment is seeing strong demand in its export business and in China but challenges in export logistics and plant shutdowns in China are likely to negatively impact earnings growth in the latter half of the year.

Click here to read the full transcript of Hormel Foods’ Q2 2022 earnings conference call