We’re a bunch of cheapskates here at Calcbench, so when Hormel Foods filed its latest quarterly report the other day, we dove into it immediately. What did Hormel have to say about the cost of goods sold, and whether rising costs for supplies are pushing up its prices?

At first glance, that line item seems troubling for Hormel ($HRL). Cost of goods sold (technically reported as cost of products sold) was $2.44 billion in its quarter that ended July 25, up 24.6 percent from $1.96 billion in the year-ago period. That jump in costs was larger than the 20.2 percent increase in revenue that Hormel saw at the same time. So even though Hormel just reported its best revenue quarter ever, that increase in cost of goods sold kept gross profit essentially flat. See Figure 1, below.

But wait! There’s a more complex story here. In June 2021 Hormel closed a $3.4 billion acquisition of Planter’s, the snack nuts business, from Kraft Heinz Co. ($KHC). So Hormel’s latest quarterly numbers aren’t necessarily comparable to what the company reported one year ago.

To get a better sense of things, we opened our Interactive Disclosures database to look into the footnotes. There, in the Acquisitions  & Divestitures section, Hormel offered some pro forma numbers of what its financial performance would have looked like if the Planters acquisition had happened in October 2019. See Figure 2, below.

Revenue would have been about $120 million higher, and net income would have been 22 percent higher. Here in the real world, however, higher Sales, General & Administrative costs, as well as higher interest expense, cut into operating profit and net income.

What you may want to take away from this disclosure is that when companies disclose Pro Forma numbers, those too, are available in the Calcbench database.  Users can grab them and use them in models.  Models like the one here which attempts to back out the Planters Revenue and Net Income in order to analyze the acquisition.  Note that Hormel paid 3.4 billion dollars to acquire Planters from Kraft-Heinz!  If our back of the envelope math is correct, it looks like it will take 88 quarters at current profitability (GAAP Net Income) to make back the purchase price.

Another notable piece of information from the Purchase Price Allocation disclosure that Hormel filed?  The Goodwill paid for the Planters acquisition was $2.3 Billion, or 67% of the total acquisition price.  

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Searching for Inflation

Wow!  Now, what did Hormel say about future pressures on cost of goods sold?

All we had to do was search for the word “inflation,” and things started coming into focus. Right at the start of the Management Discussion & Analysis, Hormel had this to say: “All four business segments absorbed higher input costs due to inflation on raw materials, freight, labor, and supplies.”

Further down, Hormel devoted an entire section to cost of goods sold. It started with this:

Cost of products sold for the third quarter and first nine months of fiscal 2021 increased due to inflationary pressures stemming from raw materials, packaging, freight, labor and many other inputs. The inclusion of the Planters snack nuts business during the third quarter also was a driver of higher costs.

All right, maybe we need to cut back on the peanuts during football season; that’s probably good for the blood pressure anyway. Then came this comparison of supply chain costs from last year to 2021:

Direct incremental supply chain costs related to the COVID-19 pandemic for the third quarter and first nine months of fiscal 2021 were approximately $2 million and $21 million, respectively. This compares to approximately $40 million and $60 million of higher operational costs related to the COVID-19 pandemic incurred in the third quarter and the first nine months of fiscal 2020.

The company expects to operate in a high cost environment for the remainder of the year.

Fair enough. But the question for financial analysts is which costs are increasing this year, and why. That is, we’re not surprised that supply costs rose sharply in 2020 — the world was suffering through enormous disruption, and scads of firms had to purchase more supplies for the health and safety of employees.

Were those higher costs in 2020 one-time expenditures for, say, plastic dividers on the shop floor? And if so, what does that mean for this year’s higher costs? Are these new costs new one-time expenditures, or transitory inflation, or something more permanent?

We at Calcbench don’t know; but we can help you find the data and disclosures companies are making, so you can ask better questions.

What Comes Next

We kept reading through Hormel’s MD&A. At the discussion of gross profit, we found a quick table showing a year-over-year decline in the company’s gross profit for both the quarter and year to date. See Figure 3, below — and also pay close heed to the narrative disclosure underneath the numbers.

Hmmm. “Broad-based inflationary pressures” affecting all four Hormel business segments. A “lag in mitigating pricing actions,” which sounds like Hormel didn’t pass along higher costs to supermarket chains and consumers — yet.

Even more telling, Hormel expects gross profit to recover “as additional pricing actions go into effect,” so it sounds like those price hikes will be coming. We may be paying a bit more at the supermarket soon; the moths that live in our wallets will not be pleased.

Conduct Your Own Research

Calcbench does make it easy for you to research the cost of goods sold at whatever firms you follow. Just visit our Multi-Company page and start typing “cost of…” in the standardized metrics field. You’ll quickly be able to search Cost of Goods Sold (COGS), the formal line item; as well as numerous metrics for guidance on cost of goods sold that companies might offer, including several non-GAAP metrics related to cost of goods sold.

But as our Hormel example demonstrates, once you find the numbers, read the footnotes anyway! Just use the Interactive Disclosures database to search relevant terms such as “inflation”, “supply chain,” or even “climate disaster” if you’re researching an agribusiness firm.  

The data is in there somewhere. We’re here to help you pull it out.


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