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How Much Did Hormel Foods’ Margins Rise in Fiscal 3Q16?

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Margins rose in 3Q16

Hormel Foods (HRL) reported an operating profit of $275 million in fiscal 3Q16—an increase of 19% compared to fiscal 3Q15. The company’s operating margin also rose to 11.9% compared to 10.5% in fiscal 3Q15. As we saw in Part 4, four of the company’s segments showed an improved operating profit and contributed to the total operating profit growth.

However, the Specialty Foods segment’s profit fell due to the divestiture of Diamond Crystal Brands.

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Hormel Foods also recorded a higher gross profit of $475 million—a 16% rise from the gross profit of $409 million in fiscal 3Q15. The company’s gross margin rose to 20.6%—compared to 18.7% in fiscal 3Q15. Net earnings for the quarter rose 33% from 3Q15. Its net margin rose to 8.5% from 6.7% in fiscal 3Q15.

Other key results in fiscal 3Q16

The company’s advertising spending was $53 million in 3Q16. This was an increase of 56% YoY (year-over-year). The company continued to invest in its brands across all five segments. The effective tax rate was 28.6% for the quarter. Capital expenditures for fiscal 3Q16 were $66 million—an increase of 57% YoY. The outstanding amount of long-term debt at the end of fiscal 3Q16 was $250 million.

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Management’s view of the fiscal 3Q16 performance

Jeffrey M. Ettinger, chairman of the board and CEO, stated that “We are pleased to announce exceptional results this quarter with three of our five segments delivering volume, sales and earnings growth. This is also our thirteenth consecutive quarter of record earnings which is a testament to our balanced business model.”

He also stated that “Excellent results in Refrigerated Foods were driven by the addition of the Applegate business, foodservice sales of Old Smokehouse bacon, Hormel Bacon 1™ fully cooked bacon, and Hormel Fire Braised meats and retail sales of Hormel Natural Choice meats. Jennie-O Turkey Store also returned to growth, posting strong double-digit sales and earnings increases.”

Peers’ performances

Hormel Foods’ (HRL) peers in the industry include Mead Johnson Nutrition Company (MJN), McCormick & Company (MKC), and General Mills (GIS). They reported operating margins of 20.2%, 17.6%, and 20.4%, respectively, in their last quarters.

To gain exposure to Hormel, you can invest in the First Trust Consumer Staples AlphaDEX Fund (FXG). It invests 2.6% in McCormick, 0.82% in Hormel, and 2.8% in General Mills. FXG has returned 9.5%, while the S&P 500 Index (SPY) has returned 7% so far in 2016.

In the next part of this series, we’ll look at Hormel Foods’ updated guidance for fiscal 2016.

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