So much for food stocks being a safe haven during volatile markets. Not only did Del Monte Foods (NYSE: DLM) report a lackluster fiscal first quarter and lower guidance a bit, but the stock has been on the skids for a few months now. Then again, it is not as though larger company stocks like Kellogg (NYSE: K) or General Mills (NYSE: GIS) have been shooting out the lights with their performance either.
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The Quarter That Was
Del Monte Foods reported that overall sales fell 1.1% in the fiscal Q1. Although the company got a little boost from pricing and new products, overall volume dropped 1.6%. By category, Del Monte saw pet product revenue rise 3.6%, while consumer product revenue fell 6%.
There is certainly no good reason to overreact to one quarter (or even a couple of quarters), but weak volume is kryptonite to food stocks. Not only does it mean less revenue to the company in the near-term, but retailers like Wal-Mart (NYSE: WMT), Target (NYSE: TGT) and Kroger (NYSE: KR) can be merciless when it comes to reducing shelf space for items that appear to be on the decline. So that leaves companies like Del Monte with a dilemma - do they raise prices to compensate for higher costs (and risk declines in volume), or do they take the hit to gross margins?
Below the top line, the news was arguably a bit better this quarter. Overall operating income was down just slightly as the company reversed its top-line segment performance. Pet food operating income was down 4%, while consumer operating income rose 6.9%.
The Road Ahead
Given that the company modestly trimmed down its forward revenue guidance, there is no apparent reason to expect a quick turnaround. According to the company, some of the pressure in this quarter was due to wider industry overhangs in the company's categories, so perhaps rivals like ConAgra (NYSE: CAG) and Dole (Nasdaq: DOLE) will tighten up inventories as the rest of the year plays out.
Longer term, Del Monte's strong brands should help cushion the blow and produce a level of growth in line with the economy. People tend to stick with the same brands over time (even in pet food), and there is also the chance that the company could gain a little market share here and there - say, for instance, by chipping away a bit at Campbell Soup's (NYSE: CPB) leading positions in ready-to-eat soups and broths.
The Bottom Line
If Del Monte can somehow reignite a little top-line growth and simultaneously improve its operating efficiency and cash-flow generation, this could be a decent stock for the next couple of years. Unfortunately, those changes are not easy to make for any company, and it begins even harder in a price-sensitive, mass-market, highly-competitive industry like food products. Del Monte is not expensive, but given the lack of momentum in the business, it looks like a stock that could stay stuck at a "value price" for a little while longer. (For more, see The Characteristics Of A Successful Company.)
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