The bottom-line numbers
In the last three quarters, Hormel Foods (HRL) has met consensus expectations twice and missed the consensus estimate in the remaining quarter. However, on a year-over-year basis, adjusted EPS for the first quarter was unchanged, whereas for the second and third quarters of 2018, adjusted EPS was up 12.8% and 14.7%, respectively. The performance was mainly due to the lower effective tax rate.
Also, higher sales aided bottom-line growth amid rising costs. SG&A (selling, general, and administrative) was up 4.2%, 12.6%, and 19.3%, respectively, for the fiscal first, second, and third quarters.
Hormel Foods also witnessed double-digit increases in freight costs. Management continues to expect freight costs to dent profitability in fiscal 2018 as well as in 2019. Also, advertising expenses are projected to increase by 20% in fiscal 2018.
To control costs, the company is streamlining its supply chain and has deployed zero-basing to the supply chain. Hormel foods also sold the Fremont processing facility to WholeStone Farms for $30 million in cash. The company expects the facility sales to lower earnings volatility. Also, the deal is inclusive of a multiyear agreement whereby Hormel Foods will be supplied with pork raw materials. The company’s exposure to the hog market will now be reduced, as it has to purchase fewer hogs.
Despite higher freight costs, Hormel Foods has reaffirmed its EPS guidance for fiscal 2018. It estimates its EPS will be in the range of $1.81–$1.95. The full-year tax rate is expected to be in the range of 15% to 16%. The tax rate in fiscal 2017 was 33.7%.
The increases in freight costs and the troubled turkey and hog commodity markets proved a drag on the margin in fiscal 2018.
Gross margin for the first, second, and third quarters of fiscal 2018 contracted 270 basis points, 100 basis points, and 100 basis points, respectively. Operating margin was down 240 basis points, 130 basis points, and 160 basis points, respectively.