Hormel profit squeezed by competition, lower prices in turkey

Hormel Foods Corp. sold more turkeys during the holidays but made less money due to low prices, its latest quarterly results showed Thursday.

Turkey prices fell to a seven-year low, "much lower than we expected," chief executive Jim Snee said. The company lowered its full-year profit outlook as a result, and investor in turn sent the company's down 5 percent.

The Austin-based food company said it earned $235.1 million during the November-to-January period, the first quarter of its fiscal year. That was flat compared to a year ago.

Low commodity prices put pressure on Hormel's Jennie-O turkey business. Sales in the unit increased 13 percent and volume increased 22 percent, but operating profit dropped 25 percent during the quarter.

Additionally, the company made significant investments to improve its biosecurity measures "to protect our business from another avian influenza outbreak," Snee said. Competition in meat protein is steep right now with some consumers being swayed by low beef prices.

The company could manage one of these three factors alone, but the combination led to lower profit margins in the unit.

As a result of the pressure in turkey products, executives said they now expect a full-year profit of $1.65 a share, down from $1.71 a share that they previously forecast.

"We clearly understand what needs to be done this year to deliver the guidance range we have provided," Snee said.

But he remains confident in the long-term marketability of turkey, which is a leaner meat that appeals to health-conscious consumers.

"We remain very optimistic about the demand," Snee said. "We have been through similar turkey commodity prices before. We just have to get through this cycle and we will."

Hormel incurred more costs last quarter as it transitioned some of its birds to being raised without the use of antibiotics. "We are making investments in that business. We think it is the right thing to do," Snee said. "And that is good for our long-term growth."

In the short-term, however, this process can be costly as poultry producers figure out how to adjust their practices to lessen the dependency on drugs.

Jennie-O accounts for 19 percent of Hormel's business, a distant second to its refrigerated foods unit that composes 49 percent of the company's net sales.

Strong performance in this large category, which saw profits rise 4 percent, helped offset the turkey loss. Refrigerated sales was buoyed by strong food service sales in Hormel Bacon 1, its fully cooked bacon product, and growth in party trays and Natural Choice lunch meats.

Profits in the grocery product unit, which includes Skippy peanut butter, Wholly Guacamole and Justin's nut butters, rose 1 percent while profits in specialty foods, with products like Muscle Milk and private label, were flat. Its international unit tallied a 5 percent profit gain.

Overall company sales fell 1 percent to $2.28 billion.

Hormel's profit amounted to 44 cents a share, up from 43 cents a year ago and the company's 15th straight quarter of per-share earnings growth. Analysts polled by Thomson Reuters expected 45 cents a share.

Kristen Leigh Painter • 612-673-4767