Hillshire Brands' Retail EBITDA Margins: We currently forecast Hillshire Brands’ Retail EBITDA margins to face downward pressure from higher commodity costs, and marketing investments in the short to medium term. We expect the company's Retail EBITDA margins to stabilize at around 15% in the long run. However, if the company is able to manage pricing gains through higher brand equity and reduce costs through its ongoing cost-cutting program effectively, margins could go upto 17%. In this case there could be a 10% upside to the Trefis price estimate.
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Hillshire Brands Company (NYSE: HSH) is a manufacturer and marketer of food products focused primarily on the meats-centric products for retail and foodservice markets. The company generates nearly $4 billion in annual sales and has approximately 9,500 employees. Hillshire Brands’ portfolio includes brands such as Jimmy Dean, Ball Park, Hillshire Farm, State Fair, Sara Lee frozen bakery and Chef Pierre pies, as well as artisanal brands Aidells and Gallo Salame.
The company, formerly known as Sara Lee Corporation, began trading under the “HSH” ticker symbol on June 29, 2012, following the spin-off of D.E MASTER BLENDERS 1753 N.V., their former international coffee and tea business. The company sells a variety of packaged meat products that include hot dogs, corn dogs, breakfast sausages, dinner sausages and deli meats, as well as a variety of frozen baked products. These products are sold through the retail channel to supermarkets, warehouse clubs and national chains in North America. The company also sells a variety of meat, bakery and beverage products to food service customers in North America.
On December 18th 2012 the company announced that it had signed an agreement to sell 100% of the shares of its Australian subsidiary ‘Kitchens’ of Sara Lee Pty Ltd to a subsidiary of McCain Foods Limited for $82 million Australian dollars in cash, which is approximately $85 million in U.S. dollars. On February 4th 2013, the company announced it had completed the sale of this division in an all cash transaction. As a result the remaining company will be focused on the two main divisions in North America: Retail and Foodservice.
Strong market share in the meats business
The North American Retail division accounts for more than 80% of Hillshire Brands’ stock value. Its key retail meat brands including Jimmy Dean (breakfast sausage), Hillshire Farm (meat and sausages) and Ball Park (hot dogs) have already been outpacing company growth. These three brands also occupy the highest market shares in their respective product categories. The company's strength in the packaged meats market provides it significant value. With the spin-off of the International Beverage and sale of the Australian Bakery Division, the company is sharply focused on the meat business going forward with strong possibility of future acquisitions.
Focused meat centric business approach
There has been increased focus on the North American meat market by the company in the past couple of years. The company spun off its International Beverage Division in June 2012 and in December 2012 the company announced the sale of its International Bakery Business. As a result the approach of the company is highly meat centric and deals in the North American markets primarily.
Higher commodity costs to put pressure on profitability
Profit gains helped Hillshire Brands drive earnings growth last fiscal year despite flat revenues. Gross margins adjusted for dispositions and the impact of other significant items expanded by almost 150 basis points on relatively lower commodity inflation. As a result, company-wide operating margins expanded by 100 basis points to 9.3% despite higher marketing and promotional expenses, which increased by ~30% y-o-y. Hillshire Brands is targeting 10% operating margin by the end of 2015.
However, we expect margins to remain under pressure over the next few quarters, as competitive pricing will prevent the company from negating commodity cost inflation. It should be noted that commodity prices were favorable for the first couple of quarters last fiscal. However, higher feed grain costs due to severe drought conditions last year have led to inflation in beef, pork and poultry prices this year, which will lead to tough comparisons.
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