The year ahead looks bright enough for Tyson Foods (TSN)

Shares of Tyson Foods (NYSE: TSN) have gained over 9% in the past five days since the company reported weaker-than-expected revenue and earnings for the second quarter of 2020.

Tyson faced many challenges during the quarter due to the coronavirus pandemic. The company had to halt production at some of its facilities and limit capacity at certain others due to a shortage in labor, leading to lower volumes.

The company saw a sharp drop in its foodservice channel and faced pressure on its supply chain. It also saw weakness in its chicken segment due to an increase in feed costs and weak pricing. This segment has a higher exposure to the foodservice channel, which hurt volumes and margins. The chicken division is expected to incur losses in the second half of the year.

Despite these challenges, the future is not totally bleak for Tyson. There are quite a number of bright spots ahead. In the second quarter, the company saw double-digit increases in its market share in Japan and Mexico as exports gained strength. Looking ahead, Tyson sees opportunities to cater to international demand as supply levels impacted by African swine fever remain low.

COVID-19 has impacted parts of the industry’s supply chain such as pork but Tyson has been able to provide its customers with various alternatives thanks to its array of protein options.

While foodservice demand has reduced, the demand in the retail channel has gained significantly. Due to the pandemic, people have stopped dining out and choose to buy easy-to-cook ingredients and meal kits which has led to high demand from supermarkets and grocery stores that are rushing to stock these items. Tyson’s shift to new product mixes and its conversion of production lines have helped it meet this demand in a stable manner.

The company’s retail business remains strong with significant gains in its core retail lines. Retail sales now comprise about two-thirds of total company sales versus the historical level of 45%.

During the third quarter, Tyson saw a 20% growth in retail sales in its Prepared Foods segment which the company believes provides the highest potential for growth and margin expansion across its portfolio.

Tyson has successfully managed to shift its beef business from the foodservice channel to retail and believes the growth in demand seen currently could continue after the pandemic subsides. The company also saw double-digit increases in beef exports and believes this provides another growth opportunity going forward.

In addition, Tyson saw significant sales growth in its ecommerce channel, which is expected to continue. Going forward, Tyson expects to see a rise in ecommerce for grocery and foodservice and believes the investments it has made in this space will position it well for growth in the future.

In the pork segment, Tyson has expanded its global supply capabilities and the company is seeing increased demand due to low supply levels caused by the African swine fever. Tyson expects to benefit from this strong supply and demand trend going forward.

The company expects volumes to drop in the second half of 2020 as the increases in retail were not enough to offset the losses in foodservice. However, for the year, Tyson expects to see strong supply and profitability in its beef division. The pork segment is expected to benefit from lower livestock costs and higher export opportunities. The Prepared Foods segment is also expected to see healthy trends in 2020 as people rely on ready-to-eat food products and snacks even after the crisis subsides.