020815 Hormel Earnings Rise, Sales Off

Chicago (Reuters) - Hormel Foods Corp. , the maker of Spam luncheon meat and Dinty Moore stew, said quarterly earnings rose despite a glut in the U.S. meat industry that forced retail prices lower and is expected to pressure earnings in the fourth quarter.

The Austin, Minnesota-based company said it earned $38.3 million, or 27 cents a share, in the fiscal third quarter ended July 27, compared with $37.2 million, or 26 cents, a year ago. The results matched analysts' average forecasts as tracked by Thomson First Call.

Third-quarter sales fell 4% to $933.8 million. Shipments were flat overall, as weakness in the Jennie-O Turkey Store business was offset by strength in food service and ethnic foods.

"They have a lot of products, particularly canned meats, which aren't really impacted by the protein glut," said Prudential Securities analyst John McMillin, who rates Hormel shares "hold."

"The protein glut has hurt turkey, but it was more the old Hormel part of the company that did well," McMillin said.

Hormel and rivals such as top pork producer Smithfield Foods Inc. have struggled with lower retail meat prices since March, when Russia, a major importer of U.S. poultry, cited health concerns in halting all purchases of chicken and turkey from the United States.

That led to an oversupply of poultry in the United States and pushed down both poultry and pork prices in grocery stores. The ban was lifted in mid-April, but Russia and the United States have been slow to resume normal trade relations.

Operating profit in grocery products rose 27% to $27.3 million, on better margins resulting from more favorable raw material costs, Hormel said. Sales of ethnic foods were particularly strong, with several brands, including Chi-Chi's sauces and Marrakesh Express grains, posting double-digit growth.

Refrigerated foods' operating profit rose 4% to $18.6 million, helped by a shift toward branded, higher- margin meat products. Foodservice had shipment gains of 10%.

The Jennie-O turkey Store business, which Hormel bought in February 2001, saw operating profit decline 26% to $15.4 million.

"The third quarter continued to be a difficult environment, but our strategy to increase value-added products within the sales mix continued to be effective," Chief Executive Joel Johnson said in a statement.

"Two ongoing factors were particularly challenging: the global protein oversupply pressured retail pricing across most proteins, and we saw further losses from our long-term procurement contracts because live animal prices remained below the prices we pay producers under contract," he said.

In addition, Hormel said recent government forecasts of lower U.S. crop production will likely result in higher grain prices this fall.

COMPANY WIDENS GUIDANCE

The company warned that it is widening its earnings guidance for the fourth quarter and the full year. It now expects earnings per share of 44 cents to 55 cents in the fourth quarter, and $1.30 to $1.41 for the year.

Analysts were banking on a range of 48 cents to 55 cents a share in the fourth quarter, with an average at 53 cents, and $1.35 to $1.40 a share in the year, with an average of $1.39, First Call said.

"The guidance is wide enough in the fourth quarter that it doesn't seem like a food company, it seems like a technology company," Prudential's McMillin said.

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