Hormel Foods (HRL, Financial) saw its Q3 performance hampered by unfavorable commodity markets and production disruptions, impacting FY24 guidance. Despite prior warnings, these headwinds were more severe than expected, affecting Q4 and causing shares to approach 52-week lows.
- Production Issues
An unplanned interruption at HRL's Planters Peanuts facility in Virginia due to a food safety issue in April impacted Q3 results by approximately $0.03 EPS. Although resolved, ramping up production is a slow process, expected to be primarily resolved by next quarter.
- Commodity Market Impact
The whole turkey bird commodity market significantly affected HRL, contributing to a 2.2% revenue drop in Q2 to $2.9 billion. Lower turkey prices indicate reduced demand. However, HRL experienced strong demand for SPAM, achieving double-digit revenue growth internationally for the second consecutive quarter.
HRL had previously warned of hitting the low end of its FY24 net sales guidance of $12.2-12.5 billion. Today, the company lowered its FY24 revenue outlook by $400 million to $11.8-12.1 billion, a significant revision compared to its Q3 top-line miss.
Despite challenges, HRL's Foodservice segment showed sound results with a 2% jump in volumes and 7% sales growth year-over-year. The International segment also displayed recovery dynamics, particularly in China, which is off to a strong start in Q4. Investments in the Philippines and Indonesia are yielding meaningful benefits.
Investors remain concerned about production issues and persistent softness in turkey prices. While production is expected to be fully operational by the end of Q4, the commodity market's fluid nature could extend challenges into FY25. Given these uncertainties, a wait-and-see approach may be prudent.
