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Hormel Foods posts strong margins and an EPS beat in Q2 2024, but revenue growth remains sluggish; disciplined cost control and low leverage support earnings quality amid ongoing input cost pressures.

# Hormel Foods Delivers Margin Strength Amid Tepid Revenue Growth in Q2 2024

---

## Executive Summary

- **Hormel Foods (HRL) delivered a modest EPS beat** in Q2 2024, reporting **$0.35 EPS versus $0.34 consensus**, while revenue growth remained subdued at **0.4% YoY**, lagging sector peers.
- **Earnings quality was robust**, with a **net margin of 6.21%**—well above industry averages—driven by disciplined cost management and a conservative balance sheet (**debt-to-equity ratio of 0.36**).
- **Management’s tone was cautiously optimistic**, emphasizing operational efficiency and cost control, but acknowledged ongoing headwinds from commodity cost pressures and limited volume growth.
- **Risks remain** around persistent input cost inflation and stagnant top-line momentum, but **opportunities exist** in HRL’s industry-leading margin performance and financial discipline, which may be underappreciated by the market.
- **Catalyst watch:** Investors should monitor upcoming management guidance updates and any signs of volume or pricing improvement, as well as further analyst upgrades following the quarter’s margin outperformance.

---

## Performance Snapshot

| Metric         | Reported | Consensus | Surprise | YoY Change |
|----------------|----------|-----------|----------|------------|
| Revenue        | $3.00B   | $2.99B    | +$0.01B  | +0.4%      |
| EPS            | $0.35    | $0.34     | +$0.01   | -2.8%      |
| Net Margin     | 6.21%    | 5.5%*     | +0.71pp  | +0.2pp     |
| ROE            | 2.24%    | —         | —        | +0.1pp     |
| Debt/Equity    | 0.36     | —         | —        | -0.02      |

*Industry average for reference.

---

## Earnings Quality

Hormel Foods’ Q2 2024 results highlight **strong earnings quality** despite lackluster revenue growth. The company’s **margin strength**—with net margin at 6.21%—reflects effective cost controls and operational discipline. While revenue growth was minimal, profitability was preserved through **tight management of commodity costs** and a lean cost structure. The company’s **low leverage** further supports earnings stability, reducing exposure to interest rate or refinancing risks.

---

## Management Commentary & Guidance

Management struck a **cautiously optimistic tone** on the earnings call, reiterating a focus on cost containment and operational efficiency. While acknowledging the challenges of **muted volume growth and commodity cost volatility**, leadership expressed confidence in their ability to sustain margin performance. Forward guidance was not explicitly raised, but management signaled ongoing vigilance regarding input costs and indicated that any improvement in volume or pricing would be reflected in future updates. Analyst upgrades and a consensus EPS expectation of **$0.41 for the next quarter** suggest a balanced, slightly conservative outlook.

---

## Key Risks

- **Commodity Cost Inflation:** Persistent input cost pressures could erode margins if not offset by further efficiency gains or pricing actions.
- **Stagnant Revenue Growth:** Limited volume and pricing power may cap top-line expansion, especially relative to sector peers.
- **Demand-Side Uncertainty:** Shifts in consumer preferences or macroeconomic headwinds could further challenge growth.

---

## Expected Market Reaction

The market is likely to respond **modestly positively** to Hormel Foods’ Q2 2024 results. The **EPS beat and margin outperformance** are clear positives, but enthusiasm may be tempered by the lack of meaningful revenue growth and the absence of a more bullish forward outlook. Analyst upgrades and continued cost discipline could support incremental gains, especially if future quarters show improvement in top-line trends.

---

## Final Takeaway

Hormel Foods delivered a **solid but unspectacular quarter**, with **earnings stability and margin strength** offsetting weak revenue growth. The market may be **underestimating HRL’s cost control and financial discipline**, which position the company well for future upside if volume or pricing trends improve. 

**Upcoming catalysts:**  
- Next quarter’s earnings and management guidance update  
- Any signs of volume or pricing acceleration  
- Further analyst upgrades or sector re-ratings

Overall, Hormel Foods’ Q2 2024 results underscore a **resilient, well-managed business**—but sustained outperformance will require a return to stronger top-line growth.

Hormel (HRL) Margin Strength Offsets Weak Sales

Hormel faces ongoing margin pressure and inventory challenges, but international growth offers a potential offset as the next quarter becomes a key test for earnings stability.

# Hormel Foods Corporation: Margin Pressures, International Momentum, and the Next Quarter’s Pivotal Test

## Executive Summary

We maintain a **Neutral** outlook on Hormel Foods Corporation (NYSE: HRL) for the upcoming quarter. While **total revenue is expected to remain range-bound at $2.90–$2.95B**, persistent **margin compression** (gross margin down to 16.7% in Q2 FY25 from 17.4% a year ago) and **elevated inventory levels** ($1.73B, up 9.5% since FY24-end) are likely to weigh on near-term earnings. The market may be underestimating the **potential for international volume growth (+8.9% YoY in Q2)** to offset domestic softness and drive a positive inflection in product mix and profitability. However, **input cost inflation** and the risk of further inventory build remain key headwinds for EPS delivery.

## Recent Trends Signal What’s Next

Hormel’s last two quarters highlight a **stable top line but deteriorating profitability**. Q2 FY25 revenue was **$2.90B** (flat YoY), but **gross margin fell to 16.7%** (from 17.4% in Q2 FY24) and **adjusted operating margin declined to 9.1%** (from 9.6%). Segment data shows **retail and foodservice volumes down 6.6% and 7.3% YoY**, respectively, while international volume rose 8.9%. EPS has trended lower, reflecting these margin pressures.

### Quarterly Financial Trend Table

| Quarter    | Revenue ($B) | Gross Margin (%) | Operating Margin (%) | EPS ($) |
|------------|--------------|------------------|----------------------|---------|
| Q3 FY24    | 2.98         | 17.4             | 9.6                  | 0.40    |
| Q4 FY24    | 2.97         | 17.1             | 9.4                  | 0.39    |
| Q1 FY25    | 2.92         | 16.9             | 9.2                  | 0.36    |
| Q2 FY25    | 2.90         | 16.7             | 9.1                  | 0.35    |

**Key takeaway:** The trend suggests continued margin pressure and flat revenue, with EPS at risk of further downside if cost headwinds persist.

## Management’s Forward Tone and Positioning

Management’s tone has shifted from cautious to **measured optimism**. In the Q2 FY25 call, the CEO stated, “We’re seeing early signs of normalization in demand and remain on track with our Transform & Modernize strategy.” This contrasts with the prior quarter’s focus on “navigating a challenging cost environment.” The **narrowing of full-year EPS guidance to $1.58–$1.68** and the upward revision of the sales floor signal **moderate confidence** in near-term execution, but also a recognition of ongoing volatility.

## KPI Trends & Upcoming Quarter Drivers

Three KPIs will be critical for next quarter’s results:

- **Volume Growth (International):** Q2 international volume up **8.9% YoY** (vs. total volume down 5.7%). If this trend persists, it could offset domestic weakness and support revenue.
- **Inventory Levels:** Inventory rose to **$1.73B** (from $1.58B at FY24-end), raising concerns about working capital and potential margin drag if turnover does not improve.
- **Advertising Spend:** Q2 spend was **$36M** (down YoY), with management signaling a ramp-up in H2. Delays could impact top-line momentum.

### KPI Movement Table

| KPI                | Q2 FY24 | Q1 FY25 | Q2 FY25 | YoY Change | QoQ Change |
|--------------------|---------|---------|---------|------------|------------|
| Total Volume (%)   | -2.1    | -4.8    | -5.7    | -3.6       | -0.9       |
| Intl. Volume (%)   | +6.2    | +7.5    | +8.9    | +2.7       | +1.4       |
| Inventory ($B)     | 1.58    | 1.65    | 1.73    | +0.15      | +0.08      |
| Ad Spend ($M)      | 42      | 38      | 36      | -6         | -2         |

**Implication:** International volume is a bright spot, but inventory and ad spend trends could cap near-term upside.

## Missed by the Street

A key overlooked signal is the **improving export mix** within international, which management noted as “beginning to show resilience.” This subtle shift, not yet visible in headline revenue, could drive a **positive margin inflection** if sustained. Additionally, the **37% YoY increase in capex** (with FCF sharply lower) suggests a near-term drag on profitability that consensus may be underestimating.

## Scenarios for the Upcoming Quarter

### Scenario Table

| Scenario | Revenue ($B) | EPS ($) | Gross Margin (%) | Key Assumptions                                                      |
|----------|--------------|---------|------------------|-----------------------------------------------------------------------|
| Bull     | 2.95         | 0.38    | 17.0             | Cost control, improved inventory turnover, robust international mix    |
| Base     | 2.90         | 0.35    | 16.7             | Current trends persist, modest T&M benefits, stable input costs        |
| Bear     | 2.85         | 0.33    | 16.5             | High input costs, slow inventory turnover, muted demand                |

**Most likely:** The **Base case** is most probable, given current evidence of stable revenue, persistent margin pressure, and only gradual operational improvement.

## Appendix – Data Tables & Management Quotes

### Quarterly Financials Table

| Quarter    | Revenue ($B) | EPS ($) | Gross Margin (%) | Operating Margin (%) |
|------------|--------------|---------|------------------|----------------------|
| Q3 FY24    | 2.98         | 0.40    | 17.4             | 9.6                  |
| Q4 FY24    | 2.97         | 0.39    | 17.1             | 9.4                  |
| Q1 FY25    | 2.92         | 0.36    | 16.9             | 9.2                  |
| Q2 FY25    | 2.90         | 0.35    | 16.7             | 9.1                  |

### KPI Movement Table

| KPI                | Q2 FY24 | Q1 FY25 | Q2 FY25 | YoY Change | QoQ Change |
|--------------------|---------|---------|---------|------------|------------|
| Total Volume (%)   | -2.1    | -4.8    | -5.7    | -3.6       | -0.9       |
| Intl. Volume (%)   | +6.2    | +7.5    | +8.9    | +2.7       | +1.4       |
| Inventory ($B)     | 1.58    | 1.65    | 1.73    | +0.15      | +0.08      |
| Ad Spend ($M)      | 42      | 38      | 36      | -6         | -2         |

### Key Management Quotes

1. **“We’re seeing early signs of normalization in demand and remain on track with our Transform & Modernize strategy.”**  
   – Q2 FY25 Earnings Call  
   *Signals cautious optimism and confidence in operational initiatives.*

2. **“The export mix is beginning to show resilience.”**  
   – Q2 FY25 Earnings Call  
   *Hints at a potential margin inflection from international business.*

3. **“We expect to realize $100M–$150M in annualized T&M benefits.”**  
   – Q2 FY25 Earnings Call  
   *Points to future margin upside if execution is successful.*

4. **“Input cost inflation, particularly in beef, remains a headwind.”**  
   – Q2 FY25 Earnings Call  
   *Highlights ongoing risk to gross margin and EPS.*

5. **“Inventory levels are elevated, but we are focused on improving turnover in the second half.”**  
   – Q2 FY25 Earnings Call  
   *Acknowledges working capital risk and the need for operational improvement.*

6. **“We are ramping up advertising investment in the back half to support key brands.”**  
   – Q2 FY25 Earnings Call  
   *Suggests a potential revenue catalyst if executed well.*

7. **“Capex is up as we invest in automation and supply chain modernization.”**  
   – Q2 FY25 10-Q  
   *Implies near-term FCF pressure but potential long-term efficiency gains.*

---

**In summary:** Hormel’s next quarter will be a test of its ability to manage margin headwinds and unlock value from international growth and operational initiatives. The base case scenario remains most likely, with upside tied to execution on inventory and cost control, and downside risk from persistent input inflation and working capital drag.

Hormel (HRL): Margin Pressure vs. International Growth