Volume Gains Will Beef Up Hillshire Brands’ Earnings

by Trefis Team
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Hillshire Brands
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The Hillshire Brands Company (NYSE:HSH) is set to announce its third quarter earning results for fiscal year 2013 on May 2. We expect the company to post strong revenue growth primarily driven by volume gains from its most prominent brands such as Jimmy Dean and Hillshire Farm. We also expect the shrinking effect of higher commodity costs and marketing expenses on its bottom-line to be partially offset by ongoing cost reduction initiatives at the company.

See Our Complete Analysis Of The Hillshire Brands Company

Slew Of New Products

Since its spin-off from Sara Lee Corporation (NYSE:SLE) in June last year, the Hillshire Brands company has introduced a slew of new products. Some of these new products introduced over the third quarter include:

  • several new breakfast offerings under its popular Jimmy Dean brand,
  • enhanced Sara Lee premium meats that meet the American Heart Association criteria for heart-healthy food,
  • a better-for-you hot dog variety in the form of Ball Park Lean Franks, just in time for the grilling season, and
  • a new range of pre-seasoned, premium Angus beef smoked sausage under its popular Hillshire Farm brand.

Innovation and product development initiatives seen so far include upgrading product quality and packaging, the expansion of existing product lines as well as the introduction of new categories. Not just that, the company has also been trying to drive higher consumption of these new products by providing increased marketing and promotional support to its brands.

Hillshire Brands announced a grand slam sponsorship with Warner Brothers and Legendary Pictures supporting the recently released movie, 42. The sponsorship program included in-store activations, consumer promotions and social media marketing of its Ball Park brand. The company’s marketing and promotional spend was up sharply by 43% y-o-y during second quarter of fiscal year 2013. As a percentage of revenues, marketing expense rose to around 4% as compared to only 2.8% last year. [1]

The impact of increased focus on marketing along with the new products launched during the first half of this fiscal year can already be seen in growing sales volume of the company’s leading 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 expect the company’s brand revival strategy to drive volume growth during the last two quarters of this fiscal year as well. [2]

Higher Commodity Costs

Commodity prices impact Hillshire Brands’ business directly because of their effect on the cost of raw materials used in making their products and the cost of inputs to manufacturing, packaging and shipment of these products. As a meat-centric food company, volatility in meat prices affects its earnings the most. According to data compiled by the Bureau Of Labor Statistics, prices of most of the meat products such as pork, beef and poultry have increased slightly on a year on year basis during the third quarter. Average porkbeef and poultry prices changed by around -0.7%, 5.6% and 8.9% y-o-y respectively.

We expect to see limited impact of price inflation in these commodities as it is expected to be mostly offset by the company’s ongoing cost saving initiatives. Hillshire Brands is targeting cost reduction opportunities of around $100 million during the three years period starting with fiscal year 2013. These cost reductions are expected to be mainly sourced from downsizing corporate resources and reducing overhead costs. Of the projected $100 million savings over the three years period, $40 million is expected to be realized during 2013 itself.

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Notes:
  1. Q2 2013 Hillshire Brands Co Earnings Conference Call, investors.hillshirebrands.com []
  2. Hillshire Brands Co at Consumer Analyst Group of New York Conference, investors.hillshirebrands.com []
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