After four years of supply chain and financial disturbances, Hormel Foods Corp. has laid out one of its more aggressive growth plans in years.
It’s about time, investors say.
Chief Executive Jim Snee last fall revealed his three-year vision to “transform and modernize” the maker of Spam, Planters and chili as the company was coming out of a volatile stretch that tanked the company’s stock price.
Hormel’s plan includes growing operating income $250 million by 2026 and getting back to its steady growth.
“Hormel is doing many of the things that for years investors had hoped it would do,” JP Morgan analyst Ken Goldman wrote earlier this month.
The company is finally coming up for air after focusing chiefly on keeping store shelves stocked with its products. While the global economy sputtered through the pandemic and its multiyear fallout — including labor shortages, transportation glitches and inflated ingredient costs — Hormel’s head of supply chain, Mark Coffey, was in triage mode.
“Our philosophy was all about supply assurance, almost at any cost, because we had to take care of our customers and consumers,” said Coffey, who is retiring after nearly 40 years at the Austin, Minn.-based company.
That led to higher prices being passed on at the grocery store, which resulted in shoppers buying fewer of its foods.
Hormel recently surprised investors with a standout quarter just three months after saying, essentially: Take a knee, gang, it’s going to be a long road back to growth.
“We will be able to return this business to its historical earnings trajectory (5-7%), and that’s important because we need to get back on that track,” Snee said in October, adding that 2024 will be a “year of investment.”
Goldman, of JP Morgan, applauded the cocktail of changes in Hormel’s three-year plan, including restructuring, cutting products that don’t sell well and focusing on existing and new products that are high-margin and “harder to imitate.”
More than 10% of the company’s individual products could be cut.
“On their own, none of these actions may be enough to move the needle in terms of investor perception,” Goldman said. “Together, though, they bespeak a company that is modernizing and aligning itself with what some might consider industry best practices.”
Coffey and his successor, Steve Lykken, said a smoother global supply chain means cost savings, which are already being reinvested into the company to meet the transform-and-modernize goals.
“We’re getting the most out of every dollar we spend,” Coffey said.
The race to keep inventory on shelves during periods of high demand in the pandemic turned into a glut of excess products that had to be sold at low prices, an era the company is finally getting past.
Now with better planning, the company’s production more closely matches typical consumption, or buying, patterns. Hormel is also using some artificial intelligence tools to improve those forecasts as much as 18 months out.
“We haven’t even gotten all of our new tech implemented yet, but we’re better at planning today than we were four years ago,” Coffey said.
Hormel will discontinue some products to focus on faster growing products that give higher profit margins, like new flavors of Planters cashews.
“We see opportunities for simplification,” Lykken said. “For example, with Hormel chili, some of the offerings aren’t contributing to the category or the company.”
Fewer products means simpler processes — especially with products that contain allergens that might require extra cleaning between manufacturing runs.
“As we take complexity out, we will lower costs,” Coffey said.
While Hormel is being proactive in its quest to return to historical rates of growth, the timing is helping. Many factors outside the company’s control — supply chain issues, high inflation for materials and inputs, labor shortages — have all eased.
That means less desperation and more negotiations.
New plants were built during the pandemic, too, and as those open, the company has more control and flexibility and, important to the three-year earnings goal, the ability to innovate.
“We were in constant triage mode, we were just fighting to get the product out every day,” Coffey said about the past several years of responding to pandemic-era demand. “We’re stronger today than we were before March 2020.”
