Hormel Falls Flat in Q1, Sending a Chill Through the Market, but Shares Still Not Appetizing

There wasn’t a ton to like in Hormel’s HRL first-quarter print. Sales fell 2% on a nearly 12% drop in volumes, gross margin contracted 100 basis points to 16.7%, and operating margin shrank 80 basis points to 9.7%. A portion of the underperformance can be attributed to the usual suspects—supply chain disruptions, unrelenting cost pressures, and the lagging impact on turkey supply from the avian flu. However, we were more troubled by the business failing to pivot to market dynamics, resulting in production across its categories eclipsing demand; Planter’s (a brand that had been a bright spot in its mix) was qualitatively referenced as particularly weak.

We see this as a blemish for a management and a business we’ve historically regarded as exemplary allocators of capital. But we don’t think this is the new norm; rather, we surmise Hormel is determined to right its ship by bringing more of its manufacturing back in-house by shuttering ties with costly co-manufacturers and unearthing cost savings. Further, we’re encouraged Hormel isn’t siphoning resources for innovation and marketing; we view this spending as supportive of the brand intangible assets that underpin our narrow moat. We think these investments are especially critical now as Hormel plans to raise prices again over the next few months, which could constrain volumes if consumers balk.

Against this backdrop, management cut its full-year EPS outlook to $1.70-$1.82 (from $1.83-$1.93), while maintaining its 1%-3% sales growth expectations. We’ll likely ratchet down our near-term profit assumptions (we had expected EPS of $1.94), resulting in a mid-single-digit percentage cut to our $37.50 fair value estimate. However, we don’t anticipate altering our long-term forecast for low-single-digit top-line growth and operating margin in the low teens. Even after the mid-single-digit pullback on the results, shares still trade north of our intrinsic valuation; we think investors should hold off on building a position.