Shares of Hormel Foods (HRL 0.64%) are more than a third lower than the high-water mark they reached in 2022, and that includes a huge stock-price advance advance following the release of fiscal first-quarter 2024 earnings. At the end of the day, Hormel's shares are still down so much because it continues to have lingering problems that need addressing.
But the recent good news, which drove the short-term stock move, could be the start of a major business turnaround. Here's what you need to know.
Hormel faces a host of problems
Over the past couple of years, food maker Hormel has been an industry laggard. Inflation has put pressure on the company's margins thanks to the rising cost of ingredients and increased employee compensation expenses, among other things.
Management did what every other consumer staples company does in such situations: It raised prices. But consumers weren't as receptive to Hormel's price increases as they were to the hikes that competitors were pushing through. So this industry-wide issue became a company-specific problem for Hormel.
Image source: Getty Images.
To put a number on that, the fourth quarter of fiscal 2023 was a particularly weak moment for its most important business. The U.S. retail segment saw volume fall 3% and sales drop 4%. While the other two divisions -- food service and foreign -- performed much better than that, retail accounts for nearly two-thirds of the top line and is far more important to Hormel's overall performance.
The mix of volume and sales declines in the consumer business in the fourth quarter strongly suggests that the company lacked pricing power.
If that were the only problem, it would be bad enough. But on top of this headwind, Hormel has also been dealing with the impact of avian flu, a slow business rebound in China following COVID-related closures, and weakness in the nut category that has occurred at roughly the same time that Hormel acquired the Planter's brand.
At the end of the day, none of these issues are individually terrible. But together, they have left investors questioning Hormel's ability to grow over the longer term.
Green shoots at Hormel
Hormel's stock jumped after it reported fiscal first-quarter 2024 earnings because it contained a very early sign of improvement. Specifically, volume in the retail segment rose 2%. To be fair, net sales still dropped 2%, so it wasn't a total win. However, the volume increase suggests that consumers are finally starting to return to the company's brands.
Furthermore, volume was strong in the other two segments. Food service volume was up 8% in the quarter, and foreign volume rose 11%. Overall, volume for Hormel increased 4%. That's a major reversal from the drop of 0.4% in Q4 of fiscal 2023.
This is just a single quarter, of course, so you should be careful about the long-term conclusions you draw from it. However, management stated that it is "reaffirming its net sales growth outlook of 1% to 3%, which assumes volume growth in key categories."
"Volume growth in key categories" isn't perhaps as strong a statement as long-term investors might like. But it does hint that Hormel sees a light at the end of the tunnel. And the fiscal first-quarter volume numbers confirm that the company continues to move toward the light.
NYSE: HRL
Key Data Points
Watch for more positive results
No business moves in a straight line. A sine curve pattern is the norm. Hormel has been suffering through the trough of the curve. Eventually, this should pass, and when it does, Wall Street will likely reward the stock with a higher valuation.
The company is not there yet, but the fiscal Q1 showing suggests that things may be starting to get better. Investors should watch the next few quarters very closely. And if you don't own this Dividend King, you might be interested to know that the 3.3% dividend yield remains near the highest levels the stock has ever seen.
Even if the turnaround takes longer than hoped, it might be worth buying the shares while they appear to be historically cheap.
