« Back to story "Heinz gains, Hormel hurts on high costs in quarter"

Comments for Heinz gains, Hormel hurts on high costs in quarter »

Posted By ap 1 year, 3 months ago in Business & Finance

MILWAUKEE (AP) _ Rising commodity costs kept weighing on food makers H.J. Heinz Co. and Hormel Foods Corp. in the most recent quarter, even as consumers continued to swallow price increases for their favorite foods.

Hormel Foods, the maker of Spam and Jennie-O Turkey, said Thursday that its fiscal third-quarter profit fell 9 percent as higher meat, fuel and other costs outweighed price increases and hurt margins. But revenue was up 10 percent, helped in part by the higher prices charged to customers.

H.J. Heinz's fiscal first-quarter profit rose 11 percent, fueled by double-digit sales growth in North America and Europe. The company, which is also facing higher commodity costs, raised prices an average of 5.2 percent across all its product lines, including Heinz Ketchup, Weight Watchers Smart Ones products and Ore-Ida potatoes, to try to keep profits strong.

Jeffrey M. Ettinger, chief executive of Austin, Minn.-based Hormel, said the company has been facing significant increases in food costs and it's constantly looking at how much to raise prices. At its Jennie-O Turkey store, costs for fuel and feed grew $53 million in the quarter. Though it raised prices — it wouldn't say by how much — that didn't cover the added cost.

"We want to present the best value we can to consumers and to our retail and food service partners, but we need to be ultimately able to cover the cost we're confronted with," he said in an interview.

The economy also hurt demand for both companies' segments that serve the food industry as consumers pulled back on their restaurant spending and ate more meals at home. Consumers, like companies, are faced with higher costs for fuel and food, so they're cutting back on expenses, including trips to restaurants.

Pittsburgh-based Heinz said sales in that segment fell 2.8 percent to $353.4 million from $363.7 million, while pricing led to a sales increase of 1.5 percent. Operating income fell 43 percent on higher commodity costs and lower volumes.

As a result, Heinz eliminated some of its products in the category and accounts that weren't contributing to profits, the company said.

"We are taking aggressive action in food service that included reduced expectations in our full-year forecast," Art Winkleblack, Heinz's executive vice president and chief financial officer, said on a conference call.

It was the only one of Heinz's segments not to see sales growth in the quarter. Net sales in its biggest market, Europe, and North America and emerging markets like Latin America were all up, driven by gains in volume and price increases.

Heinz is better able to leverage weakness in commodity costs and the U.S. economy because it has more diverse products and more business overseas, said Christopher Shanahan, a research analyst with Frost & Sullivan.

"It's a good global strategy and a good example of what a U.S.-based food company ought to be doing in order to maintain balance growth in this pretty turbulent food economy," he said.

For the three months ending July 30, Heinz said it earned $229 million, or 72 cents per share. That compares with a year-ago profit of $205.3 million, or 63 cents per share.

Revenue in the quarter rose 14 percent to $2.58 billion, an increase from $2.25 billion during the same period last year.

The earnings beat the expectations of analysts. Thomson Reuters said analysts had expected earnings of 66 cents per share on revenue of $2.46 billion for the quarter.

Hormel previously announced its earnings would fall short of analyst expectations, and they did. For the three months ended July 27, Hormel said it earned $51.9 million, or 38 cents per share. That compares with a year-ago profit of $57.4 million, or 41 cents per share.

Revenue rose 10 percent to $1.68 billion, from $1.52 billion during the same period last year.

Thomson Reuters said analysts expected earnings, excluding one-time items, of 39 cents per share on revenue of $1.62 billion.

Hormel said the quarter's results were dragged down by its Jennie-O Turkey segment, where it posted an operating loss.

Ettinger said there's still an oversupply of turkey breast meat on the market, which is also hurting margins because it keeps prices down.

Hormel has announced a 5 percent production cut, and others in the industry are doing the same, in an attempt to push prices back up.

Ettinger said the benefits of these cuts, along with lower grain costs, may not be felt until the spring of next year.

Shares of Hormel rose 30 cents, or 0.9 percent, to $35.44 Thursday, while shares of Heinz rose 28 cents, or 0.5 percent, to $51.99.