Hormel Foods Corp, the maker of Spam and other food products, raised its profit forecast for the year, encouraged by a strong performance in its grocery division, but said margins will be under pressure due to higher livestock feed costs.
The grocery division, which makes Spam, Dinty Moore Beef Stew and Hormel Chili, has products that do well in an environment where consumers are value conscious, Morningstar analyst Kenneth Perkins said.
Perkins said the addition of new products like cheesy pasta also helped growth in the division, which contributed about 16 percent of the total sales in the quarter.
Sales in the grocery division rose 24 percent and volumes jumped 20 percent during the quarter, outpacing the overall revenue growth of 4 percent.
Shares of the company were up about 2 percent at $36.52 on the New York Stock Exchange.
Hormel, which bought Unilever Plc's Skippy peanut butter brand last month, raised its earnings forecast for the year ending October by 3 cents to $1.93-$2.03 per share.
Analysts were expecting $1.96 per share on average, according to Thomson Reuters I/B/E/S.
A drought in the U.S. Midwest last year led to higher grain costs, making livestock feed more expensive and prompting many meat companies to reduce the size of their herds.
Hormel had said last year it would reduce harvest levels in its Jennie-O Turkey and pork business to counter the volatility.
"Higher grain costs and lower turkey commodity meat prices will continue to hinder margins at Jennie-O Turkey Store in the near term," Chief Executive Jeffrey Ettinger said on a post-earnings conference call.
Operating margins in its turkey division, the second largest contributor to the total sales, fell to 15.1 percent in the quarter from 20.6 percent a year earlier.
Ettinger said he expects a steeper decline in the margins for the business in the current quarter, but sees them climbing back to first-quarter levels in the second-half of the year.
Analyst Perkins said margins in the division were better than expected, but it was still too early to make predictions for the full year.
Volumes fell 2 percent in its refrigerated foods business, which produces pepperoni and sliced deli meats. Margins were squeezed by higher pork processing costs.
Overall gross margins were not affected much as the company said it was able to keep costs down.
First-quarter net income rose to $129.7 million, or 48 cents per share, in the quarter ended January 27, from $128.4 million, or 48 cents per share, a year earlier.
Revenue was $2.12 billion, just below the $2.14 billion analysts were looking for.
(Reporting by Siddharth Cavale in Bangalore; Editing by Roshni Menon and Sreejiraj Eluvangal)