When the pandemic hit in 2020, Hormel Foods (HRL -0.90%) was impacted more than many of its peers because its businesses sold protein products to restaurants. Although this business came back strongly in 2021, management thinks it has more room to run. In fact, it is the company's top priority for 2022. Here's why you need to pay attention to this sales channel even though many investors don't even know it is part of Hormel.
The big hurt
Hormel's food service sales were down by a massive 23% in the fourth quarter of fiscal 2020, which ended in October of that year. Fiscal first-quarter 2021 food service sales were not as bad, down "just" 17%. However, things got going in the fiscal second quarter of 2021 with food service sales rising an impressive 28%. Growth through this sales channel has been strong since that point.
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To be fair, part of the improvement in food service sales relates to the company lapping weak results during the pandemic. Acquisitions, notably of the Planters product line, have also helped. However, these are not the only factors in play, considering that food service sales were a massive 51% higher in fiscal Q1 2022.
Food service ranks as the number one item of the company's six major priorities in fiscal 2022. Why?
Selling a unique product
Although Hormel sells its own branded products to establishments that provide food outside the home, like other food makers, that's not the core of its food service offering. The company's history is in the meat arena. It has a number of prepared meat brands that it sells to restaurants and other eateries. For example, its Bacon 1 line is a pre-cooked bacon product, while its Cafe-H brand sells fully cooked beef, chicken, and pork products. With these products, a restaurant can save the time and effort of cooking these meats and focus on customizing them for their patrons. The food service channel is pretty big, too, accounting for 28% of the company's sales in fiscal 2021.
While buying pre-cooked meat may sound a little like cheating to those with a picky palate, it's not that unusual in the food service industry. Right now, it could be an increasingly important way to keep businesses open. That's because these timesaving tools mean a restaurant doesn't need to have as much staff on hand to cook. There's also a big benefit with regard to inflation here since incorporating Hormel's meats into a menu could mean that a restaurant doesn't need to hire back as many people, at today's higher rates, as business gets back to normal. Yes, Hormel will probably end up raising prices on its products, but that's still likely to be a lot cheaper than hiring a person to cook the meat that a restaurant would have to pay for anyway.
One of the big things to note here is that Hormel employs a direct sales group that sells into the food service space. That's fairly unique compared to its packaged food peers and gives it a direct line into this customer base. For example, it can show restaurants different ways to use its various products. It can also reach out directly to these customers and explain why integrating Hormel's fully cooked meat products can help with profit margins and staffing. Given that these are major issues facing restaurants today, Hormel's food service sales channel could help drive company performance this year. It's little wonder that management has made this a key priority in 2022.
HRL Dividend Yield data by YCharts.
Still on sale
The best part of this story has nothing to do with food service -- it's the fact that Hormel's dividend yield is roughly 2%. While that's not huge on an absolute basis, it is toward the higher side of the stock's historical yield range. That, in turn, suggests that the shares are relatively cheap today for investors seeking out a long-term dividend growth name, noting that the most recent dividend hike was a solid 6%.
