Hillshire Brands' Iron Grip on Costs

The company behind grocery-store staples such as Jimmy Dean sausages and Ball Park hot dogs, Hillshire Brands (NYSE: HSH  )  is finding ways to stay relevant in the evolving tastes and preferences of consumers. Hillshire reported earnings that came in beyond analyst expectations on both the top and bottom lines. The company is targeting high-growth areas -- convenient, unique, and healthy items. Hillshire has a strong portfolio of brands and appears to have the wind in its sails after recovering from a sharp sell-off in 2013. Will the stock price continue to plump?

What's cookin'?
Hillshire Brands outperformed even internal estimates in the recently ended quarter, though revenue grew just 2%. The company's bottom line grew 6.5% to $0.66 per share in the fiscal second quarter.

Both figures came in ahead of analyst expectations.

Beating estimates isn't in itself a selling point for a stock, but there is plenty to celebrate for Hillshire Brands amid a very difficult business environment. The company has an extremely tight grip on costs, which is what ultimately saved it throughout 2013 and will certainly help going into 2014. Jimmy Dean and Ball Park are performing about as expected, and the company's Sara Lee Bakery products are actually stabilizing from several periods of poor performance. Demand in general, though, has not compensated for the incessant rise in input costs.

Originally, Hillshire management had forecast its input costs to be elevated throughout the first half of the fiscal year, but the trend will not only last the rest of the year -- it will intensify. Now, the company expects costs to rise to levels it has not experienced before. For some in the industry, this could spell disaster, especially coupled with the recent issues in pork production around the country; peer packaged meat purveyor Tyson recently noted a deadly pig virus that could cause a 2% to 4% drop in supply for the current year. But Hillshire's cost management is second to none. The company is actually guiding on the high end of previously issued numbers, and it's all due to running a very tight ship.

SG&A costs were down significantly in the recent quarter, along with corporate expenses. Management is also not afraid to pass on the rising costs to the customer, ensuring that the financials will remain healthy even through the pending trouble ahead.

Organic
Cost management can get the company through the rough times, but can investors expect real growth in the future?

The answer, of course, varies. For Jimmy Dean, the segment is finding strength in its gimmicky items such as breakfast sandwiches and sausage on a stick. Volume and sales grew double digits in the just-ended quarter. Meatball brand Aidells also grew in the double digits. Hillshire Farm lunch meats, after a self-imposed drop-off last year, appear to be stabilizing and were roughly flat on volume with the prior year.

The divide, in grocery-store talk, is between the frozen aisle and the refrigerated goods. Luckily for Hillshire investors, the strength in the colder aisle outweighs the tepidity elsewhere. Once the year's inflation abates, these strong performers should really start to shine.

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