Like many of the largest food makers, Hormel (HRL 0.14%) is probably best looked at as a brand manager. Acquisitions play a big role in the company's growth, with its recent purchase of Planters having an outsized impact on the company given its large size. Things aren't going as well as hoped, but the long-term opportunity is bigger than just nuts.
The big deal
In 2021, Hormel inked a deal to buy Planters from Kraft Heinz for a net cost of roughly $2.8 billion. The deal included the Planters nut business, as well as Planters Cheez Balls and Corn Nuts. This was the largest acquisition in Hormel's history. Inside of Kraft Heinz, this business was largely neglected, so Hormel's management team knew it had its work cut out for it.
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As with any acquisition, the first goal was integration. That largely took place in fiscal 2022, which ended in October of that year. In the first half of fiscal 2023, however, the goal was to get the Planters business to higher levels of performance. There are a lot of things that need to be addressed.
For example, during the food maker's fiscal first-quarter 2023 earnings call, management highlighted that, under its previous owners, Planters' brand advertising was neglected, product innovation was uneventful, and packaging sizes and architecture were suboptimal. In addition, the transition of the brand to Hormel resulted in some temporary business disruption that reduced distribution amid a broader decline in demand for the entire nut category. None of these things will be quick or easy to fix.
Making the right moves
That said, Hormel is working on the problems it faces. For example, the company just brought out new nut flavors, and it is updating advertising and packaging. These efforts are showing early signs of success, despite the difficult backdrop in the nut category. For example, management noted that the Planters brand outpaced "the packaged nuts and seeds category on a volume basis" in the most recent quarter. That's a solid step in the right direction, even though the broader nut category remains under pressure.
And yet the bigger-picture story needs to be kept in mind. For example, at the time of acquisition, the Planters brand had nearly twice the household penetration of the next-largest nut brand. And Planters products could be found in most convenience stores (96% penetration), a store type that has not historically been a major outlet for Hormel. Meanwhile, Planters is one of the best-known food brands.
This might require a multi-year effort to get Planters to a point where Hormel is pleased with its performance. But the benefits are already quite material -- Hormel can leverage its Planters relationships in the convenience store category to introduce its other products into the space. Meanwhile, the Corn Nuts and Cheez Balls brands offer an entry point into more traditional snacking categories.
What's notable about the fiscal second quarter, however, is that the brand saw shipments increase 8% year over year, which was helped along by increased advertising efforts. That is a clear indication that Hormel can turn things around as it puts in the work that Kraft Heinz hadn't. But, again, it won't be an overnight recovery -- or likely even a smooth one.
A long-term play
Hormel faces a number of headwinds today, and Planters is one of them. But it has a plan to turn things around and is executing on it, to at least some early success. And given the broader opportunities, notably in the convenience store space, offered by the Planters acquisition, investors should be pleased with the purchase.
There's no doubt that Planters is a big deal, in more ways than one, but it also appears that Hormel is moving fast to get the brand on a solid growth path, with some positives hinting that it is making the right moves. With a historically high dividend yield of 2.7% or so, investors that think in decades will probably appreciate the progress being made on Planters. Indeed, the early turnaround success probably speaks more to Hormel's strong abilities as a brand manager than it does about the Planters brand itself.
