Hormel posts lower quarterly profit, reveals CytoSport sale price of $465 million

A recall days before Thanksgiving dented sales of Jennie-O lean ground turkey and threw Hormel Foods Corp.'s plans for that business off-kilter.

That recall, coupled with a polar vortex and heavy snow in the Midwest, pushed Hormel's turkey business into the red and pressured its overall bottom line in its November-to-January quarter.

Hormel on Thursday posted higher sales but lower profit for the period, the first of its fiscal year. In addition to the turkey issue, Hormel lapped last year's benefit gained from changes in the federal tax law and grappled with steep declines in the price of pork. The company's stock fell 2.6 percent.

Despite shifting its Jennie-O outlook downward, Hormel executives reaffirmed their full-year sales and profit goals. They said positive sales trends in its deli and food service businesses remain and Spam and Skippy products are expanding well in China.

Sales in the company's branded products — like Spam, Dinty Moore, Applegate and Wholly Guacamole — offset the 70 percent decline in commodity prices for the quarter ending Jan. 27.

The Austin-based food company peddles both low-margin commodities and high-margin branded consumer products, though it's shifting further from its role as a traditional meatpacker after closing the sale of its large slaughterhouse in Fremont, Neb., in December.

Hormel also revealed a price for the sale of its CytoSport business: $465 million in cash. The company announced earlier this week that it was selling CytoSport, including its Muscle Milk products, to PepsiCo. Hormel bought the firm in 2014 for $450 million.

Last year, the CytoSport business brought in $300 million in revenue for Hormel but yielded an operating margin that was slightly below the overall company's.

"The CytoSport team should be pleased with the gains they made in the innovation space," Jim Snee, Hormel's chief executive, said on a conference call with analysts and investors. "However, it became apparent that Pepsi was the right long-term owner of this business given their expertise and scale in the beverage space."

The Jennie-O business, a subsidiary based in Willmar, Minn., continues to face ongoing challenges in the U.S. turkey industry, including an oversupply that has depressed prices since 2016.

For two years, Hormel has continued to report sales declines in this business, which represents about 14 percent of the company's total sales.

But the company began seeing positive signs on industry inventory last fall. Fewer baby turkeys were being bought by growers and the amount of turkey in cold storage fell. That led Hormel executives to forecast modest sales growth for 2019.

Then came two salmonella recalls during the holidays and intense winter weather after that.

"The quarter was actually shaping up to be a good quarter for us and then we had the recalls and the polar vortex," Snee said. "We expect Jennie-O Turkey Store to fall below the plan we had for them this year."

He added that the large and persistent salmonella outbreak in the U.S., which the USDA still has yet to trace to a single source, is an industrywide problem, yet they have taken the proactive steps of issuing voluntary recalls.

"We plan to continue our leadership role in our effort to reduce salmonella and educate consumers," Snee said.

Net income fell 20 percent to $241.4 million, or 44 cents a share, matching Wall Street's expectation.

The food maker reported nearly $2.4 billion in sales for the quarter, up 1 percent from a year ago.

Global trade uncertainty continues to add volatility to Hormel's outlook as it reported steep declines in exports of fresh pork.

This was Hormel's first quarterly report under its newly reorganized business divisions. The company still has the same four segments — refrigerated foods, Jennie-O Turkey Store, grocery products and international — but moved all of its deli businesses, including Jennie-O deli products, into a division within the refrigerated foods segment. The company also folded its ingredients business into refrigerated foods.

Kristen Leigh Painter • 612-673-4767