Hormel expects turkey margin hit; shares tumble

CHICAGO Thu Aug 25, 2011 10:35am EDT

Cans of ''Spam'' luncheon meat are displayed at a market in Naha on the southern Japanese island of Okinawa March 5, 2008. REUTERS/Issei Kato)

Cans of ''Spam'' luncheon meat are displayed at a market in Naha on the southern Japanese island of Okinawa March 5, 2008.

Credit: Reuters/Issei Kato)

CHICAGO (Reuters) - Hormel Foods Corp (HRL.N) expects profit margins in its Jennie-O turkey business to be hurt in coming months as the price of corn used in turkey feed rises.

Hormel Chief Executive Jeff Ettinger told analysts the company is looking to rise prices and reduce expenses to offset the rising costs.

Hormel shares fell nearly 6 percent in morning trading after quarterly sales volume failed to rise for the first time in two years.

Like most food companies, Hormel, which also makes Spam canned meat and Dinty Moore stew, has raised prices to cope with rising costs for ingredients, oil and other commodities.

The company reported flat volume in the third quarter, ended July 31, but that was better than some competitors, which saw volume fall in the most recent quarter after raising prices.

Last week JM Smucker (SJM.N), the maker of Jif peanut butter and Folgers coffee, cut its full-year sales outlook after multiple price increases hurt demand.

"We are satisfied if we can hold the line there and continue to generate the net sales increase through both mix and pricing," Ettinger said. Mix refers to selling a higher proportion of higher-priced products.

The company now expects full-year earnings of $1.70-$1.75 a share, up from its previous forecast of $1.67-$1.73.

Hormel products that had improved sales in the third quarter included Spam, which in the past has sold well during a weak economy. But also rising were sales of Hormel microwave meals, which cost more and in the past have been hurt when the economy faltered.

Morningstar analyst Ken Perkins said the sales performance during the quarter was a sign that Hormel "across the board" has brands strong enough to do well in the current economic environment.

Third-quarter net income attributable to Hormel was $98.5 million, or 36 cents a share, up from $85.4 million, or 32 cents a share, a year earlier. Sales rose 10 percent to $1.91 billion.

Analysts, on average, were expecting earnings of 35 cents a share, before special items, on revenue of $1.88 billion, according to Thomson Reuters I/B/E/S.

The earnings beat was driven by a lower-than-expected tax rate, KeyBanc analyst Akshay Jagdale said in a research note. On a pre-tax basis, Hormel missed Jagdale's expectations by 2 cents a share, the analyst said.

Hormel shares fell $1.69 to $26.75 in morning trading on the New York Stock Exchange.

(Additional reporting by Mihir Dalal in Bangalore and Martinne Geller in New York; editing by John Wallace)