The Hillshire Brands Company today reported results for its first quarter of fiscal year 2014.
Net sales increased 1% to $984 million over the prior year's first quarter Adjusted1 operating income of $76 million, down 24.4% versus the prior year's 76.5% increase, reflecting significant input cost inflation in the quarter and unusually low SG&A in the prior year. Reported operating income was down 35.2% Adjusted diluted EPS of $0.35 down 28.6% versus the prior year's 88.5% increase; reported diluted EPS of $0.23 down 42.5%
CEO Perspective
"I'm pleased to report a solid start to the year," said Sean Connolly, president and chief executive officer of The Hillshire Brands Company. "Although input cost inflation has been significantly higher than anticipated, we continue to make good progress with our brand-building efforts. In particular, I'm encouraged by the overall strong consumption trends we've seen."
"As we've moved into the second quarter, we've begun to take additional pricing actions. While this will pressure volumes as consumers adapt to higher price points, we still expect sales trends to improve in the second half behind a robust innovation slate. We also still expect gross margins to improve in the second half, fueled by both our pricing actions and our cost efficiency programs. Accordingly, our full year guidance remains unchanged at this time."
Discussion of Continuing Operations Results
Net sales of $984 million were up 1% versus the prior year's first quarter, as positive pricing and mix in the Foodservice/Other segment more than offset a modest decline in Retail sales. Adjusted operating income of $76 million was down by 24.4% over the prior year, mainly driven by significantly higher input costs as well as low SG&A, excluding MAP, in the prior year. Reported operating income was $55 million, down 35.2% from the prior year's first quarter.
Retail
Retail net sales showed a slight decline of 0.7% in the first quarter versus a strong prior year comparable. Favorable mix was more than offset by lower volumes and lower pricing, reflecting higher above-the-line marketing investment.
Operating segment income declined by 27.8% versus a 45.5% increase in last year's comparable quarter, primarily driven by higher input costs. MAP spend was lower than in the prior year's first quarter, which reflects a modest marketing mix shift to more trade spend and slotting. SG&A costs, excluding MAP, increased versus an unusually low prior year comparable number.
Jimmy Dean grew volume and sales behind double-digit growth in breakfast sandwiches and grew share in the fast-expanding frozen protein breakfast category. Ball Park increased sales in the low single-digits with solid performance in hot dogs during the key grilling season and continued strong growth in flame-grilled patties. Aidells continued to be a strong performer for the company, driven in part by the new meatball innovations outperforming expectations.
Consistent with our expectations, effective promotional programs on Hillshire Farm lunchmeat re-engaged consumers, resulting in strong volume growth trends exiting the quarter.
Foodservice/Other
Net sales increased 5.7% from the prior year's first quarter versus a relatively easy comparable. The increase was driven by pass-through pricing to cover higher input cost inflation, as well as favorable mix and higher volumes. Excluding commodity meat sales, net sales increased 5.2%.
While the Foodservice/Other segment performed well in the quarter, the macroeconomic environment is expected to remain challenging, and the outlook for the segment remains modest.
Operating segment income was relatively flat to prior year as increased pricing fully offset higher input costs.
Corporate
Excluding significant items, corporate expenses for the quarter totaled $9 million. This includes $2 million of favorable mark-to-market gains.
Capital Allocation
During the first quarter, the company repurchased 300,000 common shares for approximately $10 million.
Consistent with its strategy to acquire on-trend brands, the company completed the previously-announced acquisition of the Golden Island jerky brand during the quarter.
Outlook
The company's fiscal 2014 guidance remains unchanged at this time. For the full year, sales are expected to increase slightly as back-half innovation helps offset expected softness associated with consumers adapting to higher price points. Adjusted diluted EPS is expected to be flat to down mid-single digits as inflationary input costs are partially offset by pricing and cost savings programs. The company expects an effective tax rate of 35%, net interest expense of $40 million, and corporate expenses of approximately $60 million, excluding significant items.
The company continues to forecast material input cost inflation through the remainder of the first half of fiscal 2014. The company now expects this trend to continue throughout the second half of the year. Despite this expectation, the company still anticipates margins will improve in the second half behind pricing actions and continued progress on cost initiatives.
