Hormel Foods Corporation

Moat: 3/5

Understandability: 2/5

Balance Sheet Health: 4/5

Hormel Foods is a global branded food and meat products company, with a portfolio spanning retail, foodservice, and international markets.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Hormel Foods Corporation (HRL), founded in 1891, is a well-established packaged food company. It is primarily known for meat products, but its brand portfolio extends into several categories including value-added proteins, refrigerated meals, and branded ethnic foods. Its products cater to a wide range of consumers and its operations span the US, and international markets. Its iconic brands include Spam, Hormel, and Skippy, among others.

Business Overview:

  • Revenue Distribution: HRL operates through three reportable segments: Retail, Foodservice, and International.
    • Retail: The retail business segment focuses on the sale of branded products directly to consumers through grocery stores, mass merchandisers, drug stores, and online channels. Its products mainly consist of shelf-stable meat, sausage, and food product.
    • Foodservice: This segment primarily sells meat and food products to foodservice distributors, restaurants, and commercial users.
    • International: This segment primarily includes sales to international subsidiaries, affiliates and licenses.
  • Industry Trends: The food industry is seeing a constant shift in customer preferences. Growing health consciousness and concerns over environment is driving demand for more “better for you” options, more plant-based proteins and a bigger push for ethically sourced products. Supply chain disruptions, commodity price volatility, increased competition, consolidation of supermarkets and distributors are affecting the company’s ability to operate profitably.
  • Margins: The company’s margins are impacted by its ability to manage input costs. HRL’s margins have faced some pressures due to increases in commodity input costs and labor costs.
  • Competitive Landscape: Hormel faces strong competition across its different segments. It competes with global food and meat companies with well-established supply chains and consumer brands. This intense competition makes maintaining market share and pricing power very challenging. Also, competitors are increasingly focusing on the health and wellness trends and offering plant-based alternatives.
  • What Makes Hormel Different: HRL has a strong brand portfolio and is a major producer of shelf-stable products. Their long history of operation in the industry gives them a strong understanding of consumer tastes and preferences. It is primarily focused on branded products, unlike other food and meat producers who are more focused on private label.

Financial Overview:

  • Revenues: For Fiscal 2023 (ended Oct 29, 2023), the company’s net sales totaled $12.0 billion.
    • The net sales in the last quarter of the same year were 3.1 billion$.
  • Net Income: For Fiscal 2023 (ended Oct 29, 2023), the company reported a net income of $812.8 million.
  • Gross Profit: For Fiscal 2023 the gross profit was $2.87 billion.
  • Operating Margins: Operating margins have been inconsistent recently. For Fiscal 2023 the adjusted operating margin fell to 9.8% because of a decline in volumes and higher input costs.
  • Cash Flow: They generated $1 billion from operating activities and ended the year with $452 million of cash.
  • Debt HRL’s long term debt has been maintained at around $1.3-$1.5 billion in the past 3 years, its current ratio has stayed relatively flat near 1.1
  • Dividends: The company has increased its dividend payout for several consecutive years. In 2023 alone the dividends increased to around $1.10 per share.

Moat Analysis:

  • Brand Recognition: HRL benefits from strong brand recognition and loyalty across its product portfolio, which enables it to charge a price premium. Its brands are known and trusted by many consumers. It seems to benefit heavily from this wide brand portfolio.
  • Distribution Network: Its existing distribution network and relationships are very wide and deeply entrenched in the retail and foodservice industry.
  • Economies of Scale: They generate substantial economies of scale as they are one of the largest food producers. However this has been offset by input costs and supply chain disruptions.
  • Switching Costs: The company does not generate any material switching costs for its customers.

Given the points above, HRL’s moat strength seems to lie primarily in its brand recognition, distribution capabilities and economies of scale, which aren’t particularly strong. Its lack of switching costs, price advantages, and innovative products makes its moat only slightly strong.

  • Moat Rating: 3 / 5

Legitimate Risks:

  • Commodity Prices: Volatility in commodity prices (including meat and agriculture) can impact its profitability and pricing. Increases in these prices put pressures on margins as they cannot be passed to the consumers as readily.
  • Supply Chain Disruptions: HRL is susceptible to disruptions in its global supply chains. Any issues in production, sourcing and shipping, can lead to higher costs, production delays, and lower sales.
  • Consumer Preference Changes: Changing consumer preferences and dietary habits can reduce demand for the company’s traditional product offerings and affect their sales if not addressed by the management. Increased trend towards plant based options in place of meat could be particularly harmful.
  • Competitive Pressures: Intense competition from other food companies can reduce its profitability and market share by impacting its pricing power.
  • Retail Competition: Competition from big retailers like Walmart, Amazon and others also puts downward pressure on margins, putting the company at risk of losing sales.
  • Labor Costs and Availability: Increasing labor costs and availability can affect its profitability and its production capabilities.
  • Regulatory Pressures: Changes in government regulations related to health and safety can be hard for the company to predict and adapt.

Business Resilience:

  • HRL’s brand and scale provides some degree of resilience by ensuring steady stream of customers
  • Their diversified product line allows them to mitigate some risks by ensuring they are not affected by changing consumer preferences.
  • Their strong presence in multiple segments helps to generate stability.
  • However, high leverage and interest expenses, as well as supply chain issues, might impair its resilience
  • The company is aware of the risks, specifically highlighting “supply chain disruptions, inflationary pressures, the geopolitical risks” and “the impact of climate change on global supply chains”
  • The company highlighted that they are “focused on what they can control: disciplined supply chain management, strong brand-building initiatives and product innovation”.

Understandability:

  • The basic business of the company is straightforward to understand, produce food. However, its accounting and financial statements are quite complex to analyze and can present a lot of difficulty for the average investor. The company’s complex debt and inventory management, along with multiple business segments and their interaction makes the business and its reports more difficult to parse through.
  • Understandability Rating: 2 / 5

Balance Sheet Health:

  • HRL carries a fairly moderate amount of debt on its balance sheet.
  • The company has a healthy amount of current assets relative to current liabilities, indicating that it could handle any issues with short-term debts.

  • It has shown consistency in cash flow from operations which is essential for growth.

  • Balance Sheet Health Rating: 4 / 5

Recent Concerns and Management Commentary

  • HRL is managing cost pressures by implementing cost optimization initiatives, which include lowering expenses in raw materials, manufacturing and supply chains. They highlighted that they will continue to focus on cost control and operational efficiency.
  • The company is actively innovating by launching new products and packaging to increase sales volumes and adapt to changing consumer preferences. It also highlighted its focus on international expansion and is working hard to accelerate those initiatives.
  • HRL has recently seen the most success in its foodservice sector and intends to aggressively support it in the upcoming quarters.