Story Stocks^®

Hormel Foods' (HRL -6%) Q3 (Jul) performance failed to bring home the bacon as unfavorable commodity markets and production disruptions clipped results in the quarter and weighed on FY24 (Oct) guidance. While HRL previously warned of these issues, spurring a significant sell-off last quarter, the headwinds proved worse than the market anticipated, largely because of the extent to which they are seeping into Q4 and the lack of clarity on when they will ease. As such, shares are slipping toward 52-week lows today.

• What is going on with production? An unplanned interruption erupted at HRL's Planters Peanuts facility in Virginia after uncovering a food safety issue in April. While management mentioned last quarter that the food safety problem had already been resolved, they warned it would still hinder Q3 results, albeit to a minor degree -- roughly a $0.03 EPS impact. However, ramping production is not an overnight process. HRL expects the disruption to be primarily resolved by next quarter, underpinning how extensive a production halt can be.
• Why are commodity markets producing such a negative impact? HRL's issue lies within the whole turkey bird commodity market. Approximately three-quarters of its 2.2% drop in revs in Q2 to $2.9 bln -- missing analyst estimates -- was related to lower prices of turkeys. Lower prices often indicate lower demand. Meanwhile, HRL is enjoying robust demand for SPAM, which delivered its second straight quarter of double-digit revenue growth internationally. This dynamic possibly illustrates an inflationary environment shifting consumer tastes.
• HRL's prior remarks compounded the frustration today. The company cautioned in May that the most likely scenario surrounding its headwinds would be hitting the low end of its former FY24 net sales guidance of $12.2-12.5 bln. However, HRL lowered its FY24 revenue outlook today by $400 mln, considerably higher than the size of its Q3 top-line miss, to $11.8-12.1 bln.

There were still several highlights from Q3, including consistently sound results within HRL's Foodservice segment, which posted a 2% jump in volumes and 7% sales growth yr/yr, and recovery dynamics unfolding across parts of the company's International segment. Within Foodservice, HRL grew sales above its peer group. In International, HRL noticed a few encouraging trends as it recovers from a challenging environment last year, including rebounding characteristics in China, which is off to a solid start to Q4. Meanwhile, HRL's investments in the Philippines and Indonesia are producing meaningful benefits.

Nevertheless, investors are discouraged by the extent of HRL's production woes and the persistent softness in turkey prices. On the plus side, production continues to ramp and should be fully up and running by the end of Q4. However, the commodity component, being out of HRL's control, remains fluid and could linger into FY25. With so many moving parts affecting HRL, it may be better to deploy a wait-and-see approach.