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Shares of Tyson Foods (TSN -7%) are getting clipped after the food processor posted underwhelming headline Q3 (Jun) results and announced the closure of four of its chicken facilities across the U.S. Tyson Foods was steadily rebounding in May after taking out pandemic lows on a closing basis shortly after posting its first net loss in over a decade last quarter. Although many alarms sounded during Q2 (Mar), as Tyson Foods encountered a "highly unusual situation," where all of its core segments -- Beef, Pork, and Chicken -- were amid challenges simultaneously, investors were somewhat encouraged by some optimistic remarks. Namely, Tyson's Chicken segment (one-third of annual sales), which saw two facility closures last quarter, had already seen operational improvements and market recovery.

Therefore, although management kept the door of additional closures open last quarter, stating that it is always looking at its overall footprint, Tyson Foods' announcement is weighing heavily on the stock. CEO Donnie King commented that the decision will lower costs, improve capacity and utilization, and strengthen the company's long-term foundation.

• Turning to JunQ numbers, Tyson Foods posted its fifth-straight adjusted EPS miss as adjusted operating margins tumbled by 600 bps yr/yr to 1.4%, and its first quarter of declining yr/yr revs since 1Q20 (Dec), with total sales slipping 2.6% to $13.14 bln, also missing analyst estimates.
• Averages prices across Pork (10% of sales) and Chicken dropped by 16.4% and 5.5% yr/yr, respectively, while Beef (38% of sales) prices ticked 5.2% higher. Unfortunately for Tyson Foods, the drop in Pork and Chicken prices did not translate to meaningful volume gains, with Chicken volumes edging just 2.8% higher yr/yr, while Pork volumes actually slipped by 1.8%. At the same time, consumers were highly sensitive to the minor jump in Beef prices, causing volumes to move 5.3% lower in the quarter.
• As a result, Beef revenue was flat, while Pork fell by over 18%, underscoring the lingering excessive supply issues in the pork industry, and Chicken inched down by 4%. Likewise, in Prepared Foods (18% of sales), which Tyson has repeatedly emphasized is a key growth pillar, sales endured a 3% drop. However, the company was encouraged by 160 bps of adjusted operating margin expansion in the segment to 9.2% as the business continued to gain pound and dollar share in retail.
• Despite the lackluster JunQ results, Tyson Foods kept its FY23 revenue outlook of $53-54 bln unchanged. Furthermore, the company anticipates adjusted operating margins toward the higher end of its (1)%-1% forecast. In the long term, Tyson remains committed to enhancing efficiency, including scrutinizing its cost structure to drive margin improvement.

Bottom line, the unfavorable themes from MarQ seeped into JunQ, causing Tyson Foods to endure challenging conditions for longer than expected and triggering another quarter of disappointing performance. On the bright side, adjusted operating income did improve by over $100 mln sequentially purely due to internal actions, including the previous two plant closures. Considering this, its additional four closures should spur margin improvement. Nonetheless, as we noted last quarter, it is better to remain on the sidelines until market conditions turn around more meaningfully.