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Hormel Foods’ Fiscal 4Q15: Why Did Margins Improve?

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Margins rose

Hormel Foods (HRL) reported a non-GAAP (generally accepted accounting principles) operating profit of $292 million in fiscal 4Q15, an increase of 11.03% compared to fiscal 4Q14. All comparisons in this article are to fiscal 4Q14. The total non-GAAP adjusted operating profit increased 18%. The company’s operating margin also improved to 12.17%.

It also recorded an increased gross profit of $495 million, a 17% rise. Gross margin changed to 20.63% compared to 16.67% in the same quarter a year ago. Net margin was 7.8% higher.

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Other key results of fiscal 4Q15

Capital expenditures for the fourth quarter of fiscal 2015 reached $47.3 million, unchanged from fiscal 4Q14. Capital expenditures for fiscal 2015 were $144.1 million compared to $159.1 million. Hormel management’s decision to delay the addition of capacity for Jennie-O fresh tray pack products in the face of lower turkey supply in 2015 affected capital expenditures.

The company paid down $165 million in debt out of the $350 million in short-term debt associated with the Applegate acquisition. It plans to repay the remaining $185 million in fiscal 2016. Long-term debt at the end of fiscal 4Q15 was $250 million.

Management’s remarks

Jeffrey M. Ettinger, chairman of the board and chief executive officer, stated, “I am proud of the excellent fourth quarter delivered by our team, achieving record earnings for the tenth straight quarter. We reported record bottom line results for the full year, with fiscal 2015 adjusted net earnings up 19 percent over last year and all five segments registering earnings growth.”

Management also mentioned that strong contributions to full-year results weren’t only from long-standing company brands such as Spam luncheon meat, Hormel pepperoni, and Dinty Moore stew, but also from more recently created or acquired product lines such as Hormel Gatherings party trays, Hormel Natural Choice meats, Wholly Guacamole dips, and Muscle Milk protein nutrition products.

The company faced some headwinds during the year. These headwinds included lower revenues, which were affected by declining pork markets, and the loss of sales and operational efficiency related to an avian influenza outbreak in the Jennie-O Turkey Store segment.

Peers’ performance

Hormel Foods’ (HRL) peers in the industry include Mead Johnson Nutrition (MJN), McCormick & Company (MKC), and General Mills (GIS). They reported operating margins of 23.1%, 13.1%, and 16.2%, respectively, in their last quarters. The Vanguard Mid-Cap Value ETF (VOE) invests 0.47% of its portfolio in HRL.

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