Pork processor Smithfield Foods Inc SFD.N reported a quarterly profit that dipped more than expected after grocers dented demand by not passing lower costs for fresh pork on to shoppers, whose spending was already crimped by $4 per gallon gasoline.
The largest U.S. pork and hog producer said on Thursday that warm weather helped increase hog supplies during the quarter that ended April 29. That put pressure on pork prices at a time when the furor over the ammonia-treated beef product dubbed "pink slime" was pummeling prices for pork trimmings.
Shares of Smithfield, which dropped as much as 8.3 percent during the trading session, closed down 5.7 percent at $18.46.
Operating profit margin for Smithfield's fresh pork business tumbled to 1 percent for the fiscal fourth quarter, down from 10 percent a year earlier. The unit accounted for just over a third of sales and less than 10 percent of operating profit during the quarter, which ended April 29.
Analysts said they expected small improvements in the highly commoditized fresh pork business.
"There is some hope that with gasoline prices declining and the pink slime situation behind us we can see some modest improvement, but I don't think we're going to see a meaningful or dramatic recovery in that business in the immediate future," Miller Tabak & Co analyst Tim Tiberio told Reuters.
He said the share decline appeared to be exacerbated by comments from Chief Executive Larry Pope.
Responding to a skeptical Wall Street Journal article, Pope said: "If you can't accept any volatility in this company, maybe you ought to be somebody who shouldn't own the stock."
"The fresh pork business is volatile and investors should be aware of it, but today wasn't the time to downplay investors' concerns over near-term risks," Tiberio said in a subsequent client note.
Smithfield reported fourth-quarter net income of $79.5 million, or 49 cents per share, down from $98.4 million, or 59 cents per share, a year earlier.
Excluding certain one-time items, the company earned 43 cents per share, 10 cents less than what analysts polled by Thomson Reuters I/B/E/S had expected.
Net sales rose 3 percent to $3.21 billion in the quarter that ended on April 29, but fell short of analysts' estimate of $3.26 billion.
While investors focused on the disappointments in fresh pork as well as hog production -- where operating profit margin also swooned -- business improved at Smithfield's packaged meat unit that contributed almost three-fourths of company operating profit.
Operating margin for its packaged meat unit, which Chief Executive Larry Pope said offered "the biggest growth opportunities," rose to 7 percent from 5 percent a year earlier.
The company, which owns the Farmland, Smithfield, Armour and John Morrell brands, said it had gained market share in products such as bacon, dinner sausage, hot dogs and deli meats.
Smithfield's package meat products don't carry premium margins commanded by competing items from producers like Sara Lee Corp SLE.N, which analysts said make them an appealing option in a weak economy.
Pope said exports were holding up, despite worries about a slowdown in China, a major customer.
"I know there's a lot of concern out there in terms of what's happening on the export fronts. Exports are very strong and very robust," the CEO said.
Pork exports from January through April were up 11.8 percent overall compared with the year earlier, according to USDA.
Chief Financial Officer Bo Manly said lower corn prices should lower the cost of hog production, while lower gas prices should put more money in the pockets of consumers just in time for summer barbecue season.
Smithfield also announced plans to buy back up to $250 million of its common stock over the next two years under a new plan.
Shares of Sara Lee, which is changing its name to Hillshire Brands, closed up 0.4 percent. Tyson Foods Inc (TSN.N), the nation's biggest meat processor, finished down 0.2 percent.
(Reporting by Aditi Shrivastava in Bangalore, Phil Wahba in New York, Lisa Baertlein in Los Angeles and Theopolis Waters in Chicago; Editing by Viraj Nair, Maureen Bavdek, Jim Marshall and M.D. Golan)