We recently initiated coverage for The Hillshire Brands Company (NYSE: HSH) with a price estimate of $38 a piece. Retail packaged meats account for the biggest source of value for the firm and drives its growth outlook. The company plans to spend more on marketing and product development to emphasize healthier meats, which has resonated well with customers in the past. This can help drive market share gains among its leading brands, which are the key engines to the company’s growth outlook discussed below.
The Growth Opportunity in Packaged Meats
The most important growth driver for the Hillshire Brands Company is its retail market share in the meat products segment. It can be easily illustrated by flattening out the graph for this particular driver on our interactive model. Doing so, we can observe that the forecasted growth in this driver contributes around $6 to our price estimate for the company. Here, we take a look at the key observable trends shaping out growth in the company’s retail market share.
The retail division makes up more than 70% of our price estimate. Hillshire Brands owns several leading brands in the packaged meat products segment. Key retail brands including Jimmy Dean (breakfast sausage), Hillshire Farm (meat and sausages), Ball Park (hot dogs) and State Fair (corn dogs), occupy leading market share positions in their respective product categories and are leading the company’s growth in the segment.
Brand building intiatives by the company marked by an increased focus on innovation and product development along with marketing and promotional (MAP) activities are the key trends expected to drive its market share in the segment higher. The company expects to increase its MAP spending as a percentage of revenues to 5%, up from the historic average of 3.5%. 
Innovation and product development initiatives include upgrading product quality and packaging, the expansion of existing product lines as well as the introduction of new categories. Earlier this year, the company announced expansion of its Jimmy Dean ‘Delights‘ with new flatbread sandwiches and Sara Lee premium meat products were enhanced for their health quotient.  The company also introduced new transparent packaging for its Hillshire Farm lunch meat products and is emphasizing quality to consumers with measures like new packaging that allows customers see the meat before buying it, which is helping drive sales. 
An impact of these measures can already be seen in growing sales volume of these brands. Ball Park hot dogs total volume increased 5.2% year-to-date during FY2013, while it decreased 4.7% during FY2012. As similar trend was also seen in other retail brands namely, Jimmy Dean up 7.2% and Hillshire Farm lunch meat up 1% against the decline of 3.6% and 7.5% respectively during FY2012.
We currently expect Hillshire Brands’ market share in the retail packaged meat products to grow from around 3% to 3.6% over the forecast period. Increased market share and innovation have long term benefits in the form of pricing power as well. This is further expected to enhance bottom line forecast of the company going forward.
Hillshire Brands also has a cost-reduction agenda of adding around $100 million to the bottom line by the end of FY2015. While most of this is expected to be neutralized by higher commodity and other raw material costs, it is expected to drive the company’s operating margins higher as well.Notes:
- The Hillshire Brands Company Discusses Plans For Growth At CAGNY, www.hillshirebrands.com [↩]
- 2013 News, hillshirebrands.com [↩]
- Hillshire Brands CEO Reveals Mysteries of meat Innovation at Analyst Conference, www.adage.com [↩]