Hormel Foods Corporation (HRL) Earnings

Management highlights

• Core Business Strategy & Portfolio Positioning - Maintains a protein-centric portfolio positioned to capitalize on sustained demand for protein products across consumer and food service channels, meeting demand across a full range of price points from value to premium. - Divested the whole bird turkey business during the quarter, refocusing the portfolio on higher-value, less volatile branded offerings. - Added its first ever Chief Technology Officer to the leadership team to accelerate digital and technology modernization, improve organizational speed and agility. • Brand & Innovation Performance - Food service: Strong broad-based performance across Hormel Natural Choice, Austin Blues, Jenny O, and Fontanini; launched new Calabrian chili pizza toppings to capture emerging menu trends, leveraging a direct sales force to partner closely with operators. - Retail: Double-digit dollar sales and share growth for Genio ground turkey; strong momentum for Applegate (driven by frozen breaded chicken and chicken breakfast sausage); strong consumption growth for the ERDES salsa portfolio, with expansion into new product categories including entrees, marinades, and seasonings; the second wave of planned pricing actions was fully implemented on-shelf during the quarter, with price elasticities performing in line with expectations. - International: Strong results in China driven by localized strategy, and continued strong global demand for SPAM. • Supply Chain & Operations - Meaningful operational improvements across vertically integrated turkey operations, driven by favorable growing conditions and improved manufacturing performance, which acted as a tailwind for segment profitability. - While logistics and fuel costs remained a year-over-year headwind, the company navigated the environment better than expected, benefiting from a more connected, responsive supply chain. - Proactive inventory rebalancing is underway for certain ambient shelf-stable products to align levels with demand and support long-term operational efficiency.

Guidance

- Management reaffirms full year 2026 guidance: organic net sales of $12.2 to $12.5 billion, and adjusted earnings per share of $1.43 to $1.51. The company is currently trending toward the upper half of the adjusted earnings per share range, but maintained the existing guidance range to reflect near-term market dynamics. - Segment-level organic sales growth expectations are unchanged: flat to low single-digit growth for Retail, mid single-digit growth for Food Service, and high single-digit growth for International. - The divestiture of the whole bird turkey business is expected to reduce full year 2026 net sales by approximately $50 million, with minimal impact to full year adjusted earnings. - Full year second half bottom-line growth is still expected, but Q3 2026 adjusted earnings are now projected to be roughly flat year-over-year, with most second half growth expected to occur in Q4 2026. - Upper half of the earnings range would be driven by continued strength in food service, sustained turkey network performance, volume/mix upside, and favorable commodity pricing relative to forecast, rather than additional incremental pricing actions.

Segment performance

Hormel Foods reported 3% year-over-year organic net sales growth in Q2 FY2026, marking the sixth consecutive quarter of organic growth. All three segments delivered positive net sales growth: 1. Food Service: Organic net sales grew 7% year-over-year (11th consecutive quarter of organic growth), and segment profit increased 11% year-over-year. It contributed the largest share of growth momentum and benefited from favorable mix at the enterprise level. 2. International: Organic net sales grew 5% year-over-year, and segment profit grew 20% year-over-year, with strong performance from China and the global SPAM branded export business. 3. Retail: Organic net sales grew 1% year-over-year, with 13% segment profit growth and gross margin expansion, coming in ahead of management expectations. Overall company gross profit increased 7% year-over-year, gross margin expanded 70 basis points to 17.4%, adjusted earnings per share grew 14% year-over-year to 40 cents, and adjusted operating margin expanded 80 basis points.

Risks & headwinds

- Elevated and volatile commodity costs (including pork, beef, and pork bellies) remain a key headwind for the back half of the year, with current pork prices tracking above original management forecasts. - Fuel prices have risen mid-quarter, and full-quarter elevated fuel costs in Q3 will create larger year-over-year logistics cost headwinds compared to Q2. - Proactive inventory rebalancing for certain ambient products will create near-term cost pressure in Q3 2026 due to temporarily lower plant utilization. - Consumer spending remains under pressure, with weak consumer sentiment and continued traffic softness in the food service channel. - Certain underperforming retail brands face structural pressure that requires targeted strategic repositioning, such as Planters which has faced weak demand for higher-priced cashew products amid consumer trade down. - The company's effective tax rate is now trending toward the higher end of its projected full year range.

Analyst Q&A

• Q: Given investor concerns about back half input cost and freight inflation, what is the reasoning for reaffirming guidance, and why is management more confident in the outlook? /

  A: Management notes six consecutive quarters of top-line growth that is expected to continue in the back half, supported by the company's protein-centric portfolio and balanced retail/food service exposure. While the company is currently ahead of plan and trending to the upper half of the earnings range, Q3 will face headwinds from full-quarter higher fuel costs, higher-than-expected commodity input prices, and temporary costs from inventory rebalancing, pushing most second half growth to Q4. These near-term headwinds do not change the underlying strength of the business, and management is more confident than ever in its growth playbook. (372 characters)

• Q: How should investors think about the drivers of Q2's better-than-expected gross margin, and what is the margin outlook for Q3 and the back half? /

  A: Q2's gross margin beat was driven by four core factors: broad-based top-line growth across all segments, full benefit from the previously announced second wave of retail pricing, favorable mix (from higher-margin food service growth and growth of premium branded products in retail), and stronger-than-expected manufacturing performance (led by favorable growing conditions for turkey that improved operational efficiency across facilities). For the back half, gross margin progression remains on track, but Q3 will face pressure from elevated freight and commodity costs, and temporary impacts from inventory rebalancing, leading to a margin that will be lower than Q2's level. (498 characters)

• Q: Food service delivered strong growth despite broad-based traffic weakness in the channel. What are the core drivers of this outperformance? /

  A: The company's direct sales force works collaboratively with operator partners to solve their key challenges, including providing labor-saving kitchen shortcuts and affordable menu options that help operators control end-consumer prices, paired with ongoing innovation to drive consumer interest (like the new Calabrian chili pizza topping line). The company also has broad-based channel coverage across commercial and non-commercial food service, allowing it to redirect resources to pockets of growth within the channel even when overall traffic is weak. Management expects this resilience to continue, and any broad traffic improvement would represent incremental upside. (461 characters)

• Q: Which retail brands are facing structural weakness, and what actions are management taking to improve their performance? /

  A: Two core businesses are underperforming: Planters and Skippy. For Planters, demand for higher-priced cashews has been weak amid consumer trade-down after recent commodity-driven price increases. Management is adjusting go-to-market strategy with enhanced data-driven promotion strategy, new pack size architecture, and increased lower-funnel digital and e-commerce investment. For Skippy, consumption was soft in the first half due to pulled promotions after a facility fire at the end of 2025, but the business is now fully back to full supply, and recent consumption data already shows significant improvement heading into the back half. (459 characters)