Executive Summary / Key Takeaways

• Hormel Foods is executing a multi-year "Transform and Modernize" (T&M) initiative, leveraging operational technology, data analytics, and portfolio optimization to drive efficiency, unlock capacity, and fuel profitable growth, targeting $250 million+ in operating income expansion by FY26.
• Despite facing near-term headwinds from commodity volatility (turkey, nuts, beef, pork), supply chain disruptions (Planters facility), and lower investment income, the company's diversified, value-added portfolio (Retail, Foodservice, International) is demonstrating resilience and expected to drive a strong earnings ramp in the second half of FY25.
• Key brands like Applegate, SPAM, Jennie-O Lean Ground Turkey, and Hormel Black Label Bacon are showing strong momentum and category leadership, supported by increased advertising investment and a robust innovation pipeline tailored to evolving consumer demand for convenience, flavor, and protein.
• The company maintains a strong balance sheet, robust cash flow generation (record in FY24), and a disciplined capital allocation strategy prioritizing dividends (59 consecutive increases), CapEx for growth, and strategic acquisitions, while remaining comfortably within its leverage targets.
• While competitive pressures exist across segments, HRL's focus on branded, value-added products, operational efficiencies gained through T&M, and strategic market positioning provide a differentiated value proposition aimed at sustaining long-term predictable growth and shareholder returns.

Setting the Scene: A Century of Evolution and the Pursuit of Predictable Growth

Hormel Foods Corporation, a name synonymous with American kitchens for generations, stands today as a global branded food company with a history stretching back to its public debut in 1928. More than just a legacy player, Hormel has consistently evolved its business model, adapting to shifting consumer tastes, market dynamics, and operational demands. A cornerstone of its identity and a key draw for investors has been its unwavering commitment to shareholder returns, evidenced by an impressive streak of 387 consecutive quarterly dividends paid and 59 consecutive years of annual dividend increases as of fiscal year 2025. This long-standing practice underscores a foundational element of its business model focused on consistent performance and returning value.

The company operates across three primary segments: Retail, serving predominantly U.S. consumers; Foodservice, catering to restaurants, convenience stores, and commercial customers; and International, extending its reach across global markets. This diversified structure, refined through past strategic initiatives like "One Supply Chain" and the "Go Forward" reorganization, is designed to provide stability and resilience in an ever-changing economic landscape. Under the leadership of CEO Jim Snee, the portfolio has been strategically shaped through targeted acquisitions, adding muscle in snacking (Planters), foodservice (Fontanini), and international markets (Ceratti), while also shedding non-core assets like Hormel Health Labs and a sow operation to sharpen focus and reduce commodity exposure.

Today, Hormel is embarking on its most ambitious transformation yet: the multi-year "Transform and Modernize" (T&M) initiative. Launched in late fiscal 2023, T&M is not merely a cost-cutting exercise but a fundamental reshaping of how the company operates, aimed at restoring its historical earnings trajectory and creating a sustainable growth engine. This initiative, by investing in people, data, technology, and brands, forms the central narrative thread for understanding Hormel's current state and future potential.

Competitive Dynamics: Navigating a Crowded Plate

Hormel Foods operates within a highly competitive food industry, facing off against large, diversified players and niche specialists across its segments. In the U.S. market, competitors like Tyson Foods (TSN), Pilgrim's Pride (PPC), Conagra Brands (CAG), and Kraft Heinz (KHC) vie for market share in overlapping categories.

Against large-scale meat processors like Tyson and Pilgrim's Pride, Hormel differentiates itself through its focus on branded, value-added products rather than purely commoditized meats. While Tyson's vertical integration and scale may offer cost advantages in raw material processing, Hormel's brands like Jennie-O Lean Ground Turkey and Hormel Black Label Bacon command premium positioning and stronger profitability. For instance, while Tyson's recent gross margins hovered around 7%, Hormel's TTM gross margin stands significantly higher at 16.51%, reflecting the value captured through branding and product differentiation. Hormel's strategic transformation of its Jennie-O business into a more demand-driven model aims to further reduce volatility inherent in commodity turkey markets, a vulnerability that larger, more integrated players like PPC might navigate differently.

In the broader packaged foods space, competitors like Conagra and Kraft Heinz bring vast portfolios and significant marketing muscle. Hormel competes directly with brands like SKIPPY peanut butter against KHC's offerings or Wholly Guacamole against CAG's snack portfolio. While these competitors may boast larger overall revenue bases and, in some cases, higher gross margins (KHC TTM Gross Margin ~35%), Hormel's strength lies in its protein-centric focus and targeted innovation within its core categories. Hormel's TTM operating margin of 8.45% demonstrates solid operational efficiency, though it trails KHC's TTM operating margin of 7%, potentially reflecting KHC's scale benefits or ongoing synergy capture. Hormel's strategic emphasis on its "flagship and rising brands" and increased advertising investment are direct responses to maintaining relevance and market share against these formidable rivals.

Indirect competition also comes from trends towards plant-based alternatives (e.g., Beyond Meat (BYND)) and shifts in consumer preferences towards fresh or prepared foods outside traditional packaged goods. Hormel's response includes innovation within its Applegate natural and organic brand and its Foodservice segment's focus on providing convenient, solutions-based proteins for operators.

Overall, Hormel's competitive positioning is characterized by leveraging its strong brand equity and focusing on higher-margin, value-added products to offset the scale advantages of larger competitors and the volatility of commodity markets. Its strategic initiatives, particularly T&M, are designed to enhance efficiency and agility, crucial factors in maintaining competitiveness in this dynamic landscape.

Operational Technology and Innovation: Fueling the Growth Flywheel

Hormel's competitive edge is increasingly being shaped by its investments in operational technology, data analytics, and a revitalized approach to innovation, all central to the Transform and Modernize initiative. While not a technology company in the traditional sense, Hormel is strategically deploying advanced systems and methodologies to enhance efficiency, responsiveness, and product development.

A core component of this is the Hormel Production System (HPS), an operational methodology focused on standardizing ways of working across manufacturing facilities. HPS aims to improve yields, increase capacity, and reduce costs. A tangible example of its impact is the deployment at the Wichita facility, which resulted in an approximately 18% increase in capacity for Hormel BACON 1 fully cooked bacon, enabling the company to meet growing demand for this profitable product without immediate, significant capital expenditure on new lines.

Complementing HPS is a significant investment in new end-to-end planning processes and technology. Historically reliant on manual processes and legacy systems, Hormel is centralizing planning activities, adopting integrated business planning, and embedding data analytics and AI. The stated goals are ambitious: enhancing service levels, reducing costs, decreasing working capital, and improving engagement across functions. While specific quantitative improvements from this system implementation are still unfolding, the strategic intent is clear – to create a more accurate demand signal and optimize the entire supply chain from planning through delivery, providing a crucial operational advantage.

These operational technologies are supported by broader investments in data and technology capabilities, totaling approximately $250 million through 2026 as part of T&M. This investment is building the analytical infrastructure needed for data-driven decision-making, aiming to gain a competitive edge across all businesses.

Innovation remains a foundational pillar, driven by dedicated R&D professionals, signature chefs, and the Brand Fuel team. Hormel achieved a notable 140 basis point increase in estimated net sales from innovation in fiscal 2024, demonstrating the effectiveness of these efforts. Recent product launches highlight a focus on meeting evolving consumer and operator needs:

• Retail: SPAM Korean BBQ (tapping into flavor trends), Applegate frozen convenient breakfast platforms and lightly-breaded chicken (convenience, natural/organic), Hormel Black Label Oven Ready bacon (convenience), Applegate organic pepperoni (emerging category).
• Foodservice: Fontanini hot honey sliced sausage (flavor trends), FLASH 180 Sous Vide chicken (labor-saving, convenience for operators).
• International: Hormel Barbecue Bites in China (meat snacking, in-country relevance).

The "so what" for investors is that these technological and innovation efforts are directly linked to the "growth flywheel" concept of T&M. Improved operational efficiency and planning (HPS, end-to-end planning, data analytics) reduce costs and free up capacity, while innovation drives top-line growth and improves product mix. This creates a virtuous cycle: T&M benefits fund further investment in brands and capabilities, which in turn drives business growth, generating more benefits. This strategic deployment of technology and focus on innovation are key to enhancing Hormel's competitive moat, improving financial performance (higher margins, increased revenue), and supporting its long-term growth algorithm.

Strategic Initiatives and Financial Performance: Building Momentum

The Transform and Modernize initiative is the engine driving Hormel's strategic direction and expected financial performance. Beyond the operational and technological advancements, T&M includes the Buy pillar focused on procurement savings and the Portfolio Optimization pillar aimed at reshaping the product mix for improved margins and growth. Progress in procurement is yielding benefits through renegotiated freight rates and streamlined sourcing. Portfolio optimization involves actively managing the product mix, including divesting non-strategic assets like Hormel Health Labs and a sow operation, and rationalizing low-volume or unprofitable SKUs to create room for higher-margin, growth-oriented products.

Financially, fiscal year 2024 saw Hormel deliver adjusted diluted EPS of $1.58, in line with expectations, despite significant headwinds. The company achieved a record $1.3 billion in operating cash flow, demonstrating the underlying strength and efficiency of the business. Gross margin increased in FY24, reflecting the early successes of T&M and the value-added portfolio.

The first half of fiscal year 2025 presented a mixed picture, consistent with management's expectations of a back-half weighted year. Q1 FY25 saw organic net sales growth of 1%, driven by Foodservice, Retail's value-added brands, and International. However, gross margin was pressured by commodity costs (pork, beef, nuts), turkey supply chain issues, and the impact of the Planters production disruption. Q2 FY25 saw comparable net sales overall, with 1% organic growth. Retail net sales were comparable, Foodservice grew 0.5% (3.6% organic), and International grew 7%. Total segment profit decreased 3% in Q2, with Retail profit up 3.6% (benefiting from T&M efficiencies and favorable SGA), Foodservice profit down 5.8% (due to margin pressures in non-core businesses), and International profit down 20.7% (due to export mix shift and Brazil softness). Consolidated earnings before income taxes decreased 6% in Q2, impacted by higher cost of products sold and lower interest/investment income, partially offset by lower SGA.

For the first six months of FY25, net sales were comparable ($5.89B vs $5.88B), with organic net sales up 1%. Retail sales were down 0.7%, Foodservice up 1.2% (4.3% organic), and International up 2.3%. Six-month segment profit was down 7.9%, with Retail down 9.1%, Foodservice down 6.7%, and International down 9.2%. Net earnings attributable to HRL were $350.6M ($0.64 diluted EPS) for the first six months of FY25, down from $408.1M ($0.74 diluted EPS) in the prior year period.

Despite the first-half pressures, management expresses strong confidence in a significant earnings ramp in the second half of FY25. This confidence is rooted in the expected acceleration of T&M benefits ($100M-$150M incremental in FY25), the anticipated tailwind from value-added turkey, continued momentum in the Planters brand as recovery progresses, broad-based growth across segments, and increased advertising investment.

Liquidity and Capital Allocation: A Foundation of Strength

Hormel's financial foundation remains robust, characterized by strong cash flow generation and a disciplined approach to capital allocation. The company generated a record $1.3 billion in operating cash flow in fiscal 2024. While cash flow from operations decreased in the first six months of fiscal 2025 ($366M vs $640M), this was primarily attributed to an intentional inventory build in Q2 FY25 to support the important summer selling season and promotional activities for brands like Planters and SPAM, as well as higher commodity input costs impacting inventory value. This is viewed as an operational decision aligned with strategic needs, rather than a sign of fundamental weakness.

The balance sheet is healthy, with $2.9 billion in outstanding debt as of April 27, 2025, and over $765 million in cash and short-term securities as of October 27, 2024. The company operates comfortably within its stated long-term leverage target of 1.5x to 2x net debt to EBITDA. A new $750 million unsecured revolving credit facility, established in March 2025, provides ample short-term liquidity and flexibility, with no outstanding borrowings as of the end of Q2 FY25.

Hormel's capital allocation strategy follows a clear waterfall: prioritizing core uses (CapEx for maintenance, dividends, mandatory debt repayment, pension obligations) before strategic investments (growth CapEx, acquisitions, additional dividends, working capital) and opportunistic uses (incremental debt repayment, share repurchases). Capital expenditures are projected at $275 million to $300 million for fiscal 2025, focusing on value-added capacity, infrastructure, and new technology – investments directly supporting the T&M initiative and future growth.

The company's dividend track record is a point of pride and a key component of its value proposition to shareholders. The recent 59th consecutive annual increase underscores management's confidence in the business's ability to generate sustainable cash flow to support these payouts. While share repurchases are authorized, the company did not execute any in the first six months of FY25, indicating a focus on other capital allocation priorities.

Outlook, Guidance, and Key Risks

Hormel's outlook for fiscal year 2025 anticipates a return to growth, heavily weighted towards the second half. The company narrowed its organic net sales growth outlook to a range of 2% to 3% and its adjusted diluted earnings per share expectations to $1.58 to $1.68. This revised EPS range implies impressive growth in the second half, building on the first half's performance.

Key assumptions underpinning this outlook include:

• Strong Segment Performance: Expected low single-digit net sales growth in Retail, mid-single-digit organic net sales growth in Foodservice, and high single-digit net sales growth in International in the second half.
• Brand Momentum: Continued recovery and growth from Planters, tailwinds from value-added turkey, and sustained strength in flagship and rising brands across segments.
• T&M Benefits: Realization of $100 million to $150 million in incremental operating income benefits from the Transform and Modernize initiative in FY25.
• Commodity Environment: Expectation that pork, beef, and nut input costs will be above last year, with turkey markets remaining depressed overall, but strategic pricing actions providing some offset.
• Increased Investment: Significant increase in advertising investments in the second half to support brand growth.
• Other Factors: Lower year-over-year interest and investment income is expected to be a drag, and the outlook incorporates a potential $0.01 to $0.02 impact from tariffs in the back half.

Management remains confident in achieving bottom-line growth from each segment in the second half and is on track for the long-term target of $250 million-plus in net operating income improvement by FY26, citing the accelerating T&M flywheel and the strength of the underlying business.

However, several risks could impact this outlook:

• Commodity Price Volatility: Fluctuations in input costs, particularly pork, beef, and nuts, could pressure margins if pricing actions or T&M efficiencies cannot fully offset them.
• Turkey Market Dynamics: While value-added turkey is expected to be a tailwind, continued volatility in whole bird commodity markets or further impacts from bird diseases could pose challenges.
• Planters Recovery: While progress is strong, a slower-than-expected ramp-up in production or regaining distribution could impact the anticipated second-half momentum.
• Consumer Environment: A strained consumer sentiment and potential trading down to lower-priced alternatives could pressure sales volume and mix in the Retail segment.
• Tariffs and Trade Policies: Changes in global trade policies could introduce unexpected costs or impact international sales.
• Operational Execution: The success of the T&M initiative relies on effective execution across numerous projects; delays or failure to realize anticipated benefits could impact financial targets.
• Legal and Regulatory Risks: Ongoing or new legal proceedings (e.g., antitrust, tax) or changes in regulations could result in unexpected costs or operational restrictions.

Hormel actively manages these risks through hedging programs, strategic pricing, supply chain optimization, portfolio management, and ongoing operational improvements via T&M.

Conclusion

Hormel Foods is at a pivotal juncture, actively transforming its operations and portfolio through the ambitious Transform and Modernize initiative. While the first half of fiscal 2025 reflected the impact of challenging commodity markets and operational disruptions, the narrative for the second half and beyond is one of expected acceleration, driven by the realization of T&M benefits, the recovery and growth of key brands like Planters, and the inherent resilience of its diversified, value-added portfolio across Retail, Foodservice, and International segments.

The company's strategic investments in operational technology, data analytics, and innovation are building a more efficient, agile, and competitive organization. Coupled with a strong balance sheet, robust cash flow generation, and a steadfast commitment to dividend growth, Hormel is positioning itself to navigate market dynamics, outperform competitors in key segments, and deliver on its long-term growth algorithm. The successful execution of the T&M initiative and the sustained momentum of its branded portfolio will be critical indicators for investors watching Hormel's journey towards predictable, profitable growth.