Hormel Foods Corporation — Q1 FY2024 Form 10-Q
Reporting period: Quarter ended January 28, 2024; comparisons are to the quarter ended January 29, 2023. Amounts are in U.S. dollars unless stated otherwise.
Financial performance
| Metric | Q1 FY2024 | Prior-year quarter | Change |
|---|---|---|---|
| Net sales | $2.997 billion | $2.971 billion | +0.9% |
| Gross profit / margin | $508.7 million / 17.0% | $495.9 million / 16.7% | Margin +0.3 percentage points |
| Operating income | $284.4 million | $289.5 million | -1.7% |
| Earnings before income taxes | $285.5 million | $281.2 million | +1.5% |
| Net earnings attributable to Hormel | $218.9 million | $217.7 million | +0.5% |
| Diluted EPS | $0.40 | $0.40 | Flat |
| Adjusted diluted EPS (non-GAAP) | $0.41 | $0.40 | +2.5% |
| Operating cash flow | $404.0 million | $203.6 million | +98% |
| Capital expenditures | $47.2 million | $37.1 million | Increased |
SG&A rose 8.3% to $240.4 million, or 8.0% of sales versus 7.5%. The company attributed the increase partly to employee and external costs, including transformation and modernization expenses. Cost of products sold increased 0.5%, while cost per pound declined 3%. The effective tax rate was 23.4%, compared with 22.6%.
Segments and notable changes
- Retail: Sales declined 2.4% to $1.911 billion and segment profit fell 3.3% to $149.5 million. Lower commodity turkey pricing, lower contract manufacturing volume, and reduced MegaMex earnings weighed on results.
- Foodservice: Sales increased 9.4% to $913.1 million and segment profit rose 10.1% to $150.2 million, supported by broad-based volume growth and favorable logistics costs.
- International: Sales declined 3.3% to $172.6 million, while segment profit increased 0.6% to $20.0 million. Indonesia and the Philippines contributed positively; lower branded exports and China sales were headwinds.
Overall volume increased 3.7%. Higher Foodservice sales and volumes across segments offset weaker sales in Retail and International. Higher interest and investment income, up 92.5% to $19.4 million, also supported pretax earnings; the filing cites stronger rabbi-trust performance and higher interest income.
Cash, debt, and liquidity
- Cash and cash equivalents were $963.2 million at quarter-end, up from $736.5 million at fiscal year-end. Operating cash flow was $404.0 million; investing cash outflow was $48.2 million and financing cash outflow was $133.4 million.
- Cash flow benefited from a $103.9 million inventory decrease. The prior-year investing outflow included the $411 million Garudafood minority-interest purchase.
- Total debt was $3.311 billion, including $954.0 million of current maturities; long-term debt excluding current maturities was $2.357 billion. Cash exceeded current maturities, but the $950 million 0.650% notes mature in June 2024.
- On January 30, 2024, after quarter-end, the board approved up to $500 million of new long-term financing, intended together with cash on hand to repay the 2024 notes at maturity. The $750 million revolving credit facility had no outstanding draws. Hormel reported compliance with debt covenants.
- Current assets were $3.367 billion and current liabilities were $2.261 billion. The company said operating income, cash, borrowing capacity, and capital-market access should be adequate for its commitments.
Outlook, risks, and contingencies
- Management expects input costs to moderate from elevated levels, but pork, beef, and feed costs are expected to remain volatile and above historical levels. The transformation and modernization initiative is expected to generate fiscal 2024 savings in packaging, logistics, and production.
- For Q2 FY2024, management expects gross margin to be comparable with the prior year. Retail segment profit is expected to decline; Foodservice profit is expected to increase; International profit is expected to increase significantly.
- The fiscal 2024 effective tax rate is expected to be 21%–23%; capital expenditures are estimated at $280 million. Fiscal 2024 annual dividend rate increased to $1.13 per share. The filing does not provide full-year EPS guidance.
- Management cited risks including weaker consumer or foodservice demand, pricing and turkey-market pressures, operating-cost increases, China softness, export commodity headwinds, raw-material volatility, livestock and poultry disease, labor costs, litigation, cyber risk, and foreign-exchange exposure.
- The company faces pork and turkey antitrust cases and poultry and red-meat wage antitrust litigation. It recorded no liability, stating losses were not considered probable and reasonably possible losses could not be estimated. Management said resolution of currently known legal matters is not expected to materially affect financial condition, results, or liquidity.
- Transformation and modernization costs were excluded from certain non-GAAP measures: $10.3 million pretax and $7.9 million after tax in the quarter. GAAP diluted EPS was $0.40 versus adjusted EPS of $0.41.
Important facts for investors to verify
- How the June 2024 $950 million note maturity will be funded, including the amount and terms of the planned financing.
- Whether operating cash flow remains strong after the quarter’s inventory reduction and changes in payables and accrued expenses.
- Whether Foodservice growth and expected International improvement offset Retail pressure, particularly turkey pricing and consumer-demand risks.
- Whether transformation savings materialize and how associated costs affect GAAP results versus adjusted measures.
- Developments in antitrust and wage litigation, and any change in management’s assessment of potential losses.
- The Garudafood investment’s reported carrying value and performance: the filing states its quoted market value was $279.4 million versus an original $425.8 million purchase price; investors should assess valuation and impairment disclosures in context.