Tyson Foods Inc. said Tuesday (Feb. 26) that its second fiscal quarter has been more challenging than anticipated thanks to shrinking profit margins.
The meat giant joins the likes of Wal-Mart and Darden Restaurants in issuing near-term caution in recent days.
"Margins have been compressed throughout the past month as the value of beef has fallen more than the price of cattle. Historically, adjustments occur that allow for a spread between the revenue and the cattle cost. We run our plants for margin, not market share," Jim Lochner, chief operating officer, candidly told investors Tuesday at Goldman Sachs 17th Annual Agribusiness Conference in New York.
He said Tyson's pork business has also experienced some margin compression in this quarter, although there have been signs of improvement recently.
"We expect to continue our strong performance in the back half of the year," Lochner added.
This tone was a little more cautious than that shared with analysts less than a month ago during the company’s earnings call and investors took note.
Shares of Tyson Foods tumbled on the cautious sentiment after rallying in recent weeks. Tyson shares lost more than 3.5% in value to close at $22.42 on Tuesday after a very heavy day of trading.
Meanwhile, Tyson says its chicken segment has continued to do well. Chicken represents about one-third of Tyson’s total sales.
"Demand is strong, and we're seeing signs of consumers trading from beef to chicken," Lochner said. "Even with pricing up substantially year over year, chicken is a good value for consumers, and food service continues to promote chicken heavily."
The U.S. Department of Agriculture reports chicken production (ready-to-cook) pounds rose 6% in January from a year ago as processors are raising more chickens for slaughter.
PRODUCT INNOVATION
Tyson CEO Donnie Smith has said Tyson will grow its sales revenue to $35 billion this year, despite the short-term challenges.
Product innovation is one of the core tenants Tyson said it is focusing on this year. On Tuesday, Lochner delivered with news of a new line of all natural chicken under the “NatureRaised Farms" brand. This brand will include a variety of fresh products made from cage-free chickens raised without the use of antibiotics or added hormones and fed a vegetarian diet. Company officials expect NatureRaised Farms fresh chicken to be available for sale to retailers in April.
Lochner said this new product line is just one way Tyson is delivering on more valued-added sales that provide for higher profit margins.
Dennis Leatherby, Tyson's chief financial officer, told investors at the conference there is value in the diversity of Tyson's multi-protein, multi-channel, multi-national business.
"We're going to grow sales of domestic value-added chicken and prepared foods," Leatherby said. "We're not a commodity protein company. That's not our goal, nor our destiny. Value added is currently about a third of our sales, which includes food service as well as branded retail products.”
ANALYST DOWNGRADE
But despite Tyson’s efforts to leverage its strong balance sheet and diversified meat business, some analysts have taken a step back.
Ahead of the market opening, Stephens Inc. analyst Farha Aslam reduced her fiscal 2013 earnings per share estimate given the difficulties in beef and the ongoing losses in that segment. She downgraded Tyson to equal weight, or a hold position from the overweight, or buy position, held for several quarters.
Aslam cut the full year earnings to $2 per share, down from $2.23 and reduced her target share price from $28 to $26.
“The Stephens Beef Margin has been weaker than we had anticipated over the past six weeks, averaging a loss of $55 per head. We note that Tyson outperforms the basic industry average due to the company's scale and specialty programs. That said, the Stephens Beef Margin is a good indicator of profit trends for both the industry and Tyson Foods,” she recently noted to investors.
In terms of pork, Aslam said margins have been soft in late January-early February due to a tight availability of hogs, volatile cash hog markets and constrained domestic pork demand.