HORMEL FOODS CORP /DE/ (HRL)

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

RESULTS OF OPERATIONS

Overview

The Company is a global manufacturer and marketer of branded food products and remains focused on driving long-term growth through a balanced business model, a diverse portfolio, and a commitment to creating value for all stakeholders. The Company’s three reportable segments, Retail, Foodservice, and International, are described in Note O - Segment Reporting in the Notes to the Consolidated Financial Statements in this Quarterly Report on Form 10-Q.

The Company discloses certain measures not defined by United States (U.S.) Generally Accepted Accounting Principles (GAAP), including organic volume, organic net sales, adjusted cost of products sold, adjusted selling, general and administrative (SG&A), adjusted SG&A as a percent of net sales, adjusted equity in earnings of affiliates, adjusted operating income, adjusted earnings before income taxes, adjusted provision for income taxes, adjusted net earnings attributable to Hormel Foods Corporation, adjusted diluted earnings per share, and adjusted segment profit. The Company utilizes these non-GAAP measures to understand and evaluate operating performance on a consistent basis. For additional information and reconciliations to the most closely comparable measures calculated in accordance with GAAP, see the "Non-GAAP Measures" section of this Item.

Diluted earnings per share was $0.11 for the third quarter of fiscal 2026, down 67 percent compared to the same period last year. Adjusted diluted earnings per share for the third quarter of fiscal 2026 was $0.37, up 6 percent compared to the same period last year. Significant factors impacting the quarter are listed below. All comparisons are to the same period of the prior year unless otherwise noted.

•Net sales for the third quarter of fiscal 2026 decreased 2 percent. Organic net sales decreased 2 percent with growth from the Foodservice segment offset by declines in the Retail and International segments.

•Total segment profit for the third quarter of fiscal 2026 decreased 17 percent, while adjusted segment profit was flat to the prior year, as growth in the Foodservice segment was offset by declines in the Retail segment. Adjusted segment profit in the International segment was comparable to the prior year.

◦The decrease in Retail segment profit was due to lower sales and higher logistics expenses, which were partially offset by lower SG&A.

◦The increase in Foodservice segment profit was driven primarily by higher sales and improved margins, which were partially offset by higher logistics expenses and higher SG&A.

◦The decrease in International segment profit was significantly impacted by the non-cash impairment of a minority investment in Indonesia.

•Earnings before income taxes decreased 56 percent for the third quarter of fiscal 2026, primarily due to a $56 million loss related to the Brazil divestiture, a $48 million non-cash impairment charge, and a litigation settlement of $38 million. Adjusted earnings before income taxes increased 3 percent, as lower SG&A were partially offset by lower net sales and higher logistics expenses.

•The pre-tax impact of nonrecurring expenses and discrete items in the third quarter of fiscal 2026 was $155 million, including a loss related to the Brazil divestiture, a non-cash impairment of a minority investment in Indonesia, a litigation settlement, and the Company’s Transform and Modernize (T&M) initiative.

Cash flow from operations was $769 million for the first nine months of fiscal 2026, a 47 percent increase primarily reflecting improved inventory management and working capital performance.

Entering the fourth quarter of fiscal 2026, the external environment remains dynamic, with continued volatility associated with macroeconomic and geopolitical conditions. The Company is actively working to mitigate the impact of these conditions. However, continued pressure from the external environment, at a level greater than expected, could have an adverse impact on results of operations.

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Consolidated Results

Volume, Net Sales, Earnings, and Diluted Earnings Per Share

Volume and Net Sales

Volume and net sales decreased for the third quarter of fiscal 2026, while volume decreased and net sales increased for the first nine months of fiscal 2026.

For the third quarter of fiscal 2026, net sales increased in the Foodservice segment, while net sales declined in the Retail and International segments. The enterprise organic net sales decline was driven by weaker performance in commodity turkey, the bacon portfolio, and the strategic exit from select non-core private label snack nuts items, which more than offset strong growth in premium prepared proteins, the Jennie-O® turkey portfolio, contract manufacturing, and pizza toppings.

For the third quarter of fiscal 2026, volume decreased for all three segments, primarily driven by the commodity turkey portfolio.

For the first nine months of fiscal 2026, net sales growth in the Foodservice and International segments offset declines in the Retail segment. Strong enterprise performance across the Jennie-O® turkey portfolio, premium prepared proteins, and the Foodservice customized solutions business were key drivers of organic net sales growth. For the first nine months of fiscal 2026, volume declined in all three segments, driven primarily by the commodity turkey portfolio and the strategic exit from select non-core private label snack nut items.

In fiscal 2026, the Company expects net sales growth, which assumes growth across a broad range of categories, increased brand support, and market-based pricing actions. Risks to this outlook include slowing consumer demand and commodity price fluctuations.

Cost of Products Sold

Cost of products sold decreased for the third quarter of fiscal 2026. Lower volume and favorable pork input costs were partially offset by higher beef input costs and higher logistics expenses.

Cost of products sold increased for the first nine months of fiscal 2026, as lower volume, higher beef input costs, and higher logistics expenses were partially offset by favorable pork input costs.

On a per pound basis, cost of products sold increased for both the third quarter and first nine months of fiscal 2026 compared to the prior year.

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Gross Profit

For the third quarter of fiscal 2026, gross profit as a percent of net sales decreased. For the first nine months of fiscal 2026, gross profit as a percent of net sales increased.

Gross profit as a percent of net sales increased for the Foodservice segment and decreased for the Retail and International segments in the third quarter and first nine months of fiscal 2026 compared to the prior year.

Selling, General, and Administrative (SG&A)

For the third quarter of fiscal 2026, SG&A and SG&A as a percent of net sales increased, driven primarily by a loss related to the Brazil divestiture and a litigation settlement. Adjusted SG&A and adjusted SG&A as a percent of net sales decreased, driven primarily by lower employee-related expenses and a reduction in marketing and advertising.

For the first nine months of fiscal 2026, SG&A and SG&A as a percent of net sales increased, driven primarily by the loss on the sale of the whole-bird turkey business, a loss related to the Brazil divestiture, and a litigation settlement, which were partially offset by the gain on the sale of Justin's, LLC. Adjusted SG&A and adjusted SG&A as a percent of net sales decreased, driven primarily by a reduction in marketing and advertising.

Advertising investments in the third quarter of fiscal 2026 were $34 million, a decrease of 18 percent compared to the prior year, partially due to the timing of advertising campaigns. Advertising investments in the first nine months of fiscal 2026 were $108 million, down 10 percent compared to the prior year. In fiscal 2026, the Company expects advertising investments to be comparable to the prior year, as it continues to support its priority brands.

Equity in Earnings of Affiliates

Equity in earnings of affiliates for the third quarter and first nine months of fiscal 2026 decreased, primarily driven by a $48 million non-cash impairment charge related to a minority investment in Indonesia.

Interest Income, Interest Expense, and Other Income (Expense), Net

Interest income increased in the third quarter and the first nine months of fiscal 2026, as higher cash balances more than offset the impact of declining interest rates. For the third quarter and the first nine months of fiscal 2026, interest expense was marginally higher co

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Item 7.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The Company is a global manufacturer and marketer of branded food products and remains focused on driving long-term growth through a balanced business model, a diverse portfolio, and a commitment to creating value for all stakeholders. The Company reports its results in the following three reportable segments: Retail, Foodservice, and International.

A review of the Company’s fiscal 2025 performance compared to fiscal 2024 appears in the following section. A review of fiscal 2024 performance compared to fiscal 2023 is set forth in Part II, Item 7 of the Company’s Annual Report on Form 10-K for the fiscal year ended October 27, 2024, under the caption "Management’s Discussion and Analysis of Financial Condition and Results of Operations," which is incorporated herein by reference.

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The Company discloses certain measures not defined by U.S. Generally Accepted Accounting Principles (GAAP), including organic volume, organic net sales, adjusted selling, general and administrative (SG&A), adjusted SG&A as a percent of net sales, adjusted operating income, adjusted net earnings, adjusted diluted earnings per share, and adjusted segment profit. The Company utilizes these non-GAAP measures to understand and evaluate operating performance on a consistent basis. For additional information and reconciliations to the most closely comparable measures calculated in accordance with GAAP, see the "Non-GAAP Measures" section of this Item. All forward-looking comparisons for fiscal 2026 are comparing fiscal 2025 GAAP figures to projected fiscal 2026 GAAP figures, unless otherwise noted.

Results of Operations

OVERVIEW

Fiscal 2025: The Company believes fiscal 2025 was a challenging year, as strong net sales performance did not translate into net earnings growth. Net sales totaled $12.1 billion, an increase of 2 percent compared to the prior year. Growth was driven by all three segments, and the Company delivered four consecutive quarters of net sales gains.

In fiscal 2025, the Company experienced persistent input cost inflation, primarily related to commodity markets, which significantly pressured earnings. Pork belly, beef, and nut input costs caused the most earnings pressure during the year.

The Company continued to support its strategic programs during fiscal 2025, including its multi-year Transform and Modernize (T&M) initiative. The Company made meaningful progress on the initiative, which is expected to deliver long-term value to the organization. The Company also recognized expenses associated with a corporate restructuring plan designed to reduce administrative expenses, improve efficiencies, and align its workforce to the Company’s future needs, while enabling continued investment in the Company’s growth.

SG&A decreased in fiscal 2025 primarily due to the lapping of antitrust settlements incurred in the prior year, lower advertising spend, and proceeds from a legal settlement. Adjusted SG&A as a percent of net sales was comparable to the prior year.

Operating income decreased 33 percent compared to the prior year, as earnings were significantly impacted by non-cash impairment charges recorded in the International and Retail segments. Adjusted operating income decreased 11 percent.

Net earnings decreased 41 percent compared to the prior year due to the above factors and a higher effective tax rate primarily driven by impairment charges. Adjusted net earnings declined 13 percent. Diluted earnings per share and adjusted diluted earnings per share for fiscal 2025 were $0.87 and $1.37, respectively, compared to $1.47 and $1.58 in the prior year.

Capital expenditures in fiscal 2025 were $311 million, including investments in capacity expansions for Hormel® Fire Braised™ and Applegate® products, data and technology, people and animal safety, and the Jiaxing, China, facility. The Company continues to prioritize investments in growth, innovation, cost savings, automation, and maintenance.

Dividends paid to shareholders were a record $633 million.

Changes in global trade policies, including tariffs and retaliatory tariffs, had a minor impact on the Company’s results of operations during fiscal 2025. The Company continues to monitor and evaluate the impact of proposed and enacted tariffs, including proposed and enacted retaliatory tariffs, and other trade restrictions, as well as its ability to mitigate their impacts.

Fiscal 2026 Outlook: The Company continues to navigate through a dynamic consumer and operating environment. Organic net sales growth of 1 percent to 4 percent is expected in fiscal 2026, which the Company anticipates being driven by growth across a broad range of categories, increased brand support and innovation, market-based pricing actions, and the Company’s current assumptions for raw material costs. From a bottom-line perspective, segment profit growth from all three segments is expected in fiscal 2026. Diluted earnings per share are expected to be $1.29 to $1.39 and adjusted diluted earnings per share are expected to be $1.43 to $1.51. Earnings are expected to decline in the first quarter of the year, followed by growth in each of the remaining three quarters. Major risks to the outlook include incremental inflationary pressures and the impact of deteriorating macroeconomic conditions on the Company’s customers, consumers, and operators.

The Company remains in a strong financial position due to its operating cash flow, liquidity, and solid balance sheet. The Company plans to continue to support the business through increased marketing and advertising investments for its leading brands. Further, continued capital expenditure investments are expected, including investments in data and technology and value-added capacity expansions.

The implied annualized dividend rate for 2026 is $1.17 per share, representing an increase of 1 percent and marking the 60th consecutive year of dividend increases. Returning cash to shareholders in the form of dividends remains a top priority for the Company.

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CONSOLIDATED RESULTS

Volume, Net Sales, Net Earnings (Loss) and Diluted Earnings (Loss) Per Share

Net sales increased for the fourth quarter and full year of fiscal 2025 while volume declined over both periods.

For the fourth quarter of fiscal 2025, net sales growth across the Retail and Foodservice segments offset declines in the International segment. Net sales growth across the enterprise was driven primarily by the Jennie-O® turkey portfolio, Foodservice customized solutions business, Planters® snack nuts, Applegate® natural and organic meats, and premium prepared proteins, and the SPAM® family of products.

For the full year fiscal 2025, net sales increased in each segment. Net sales growth for the full year was driven primarily by the Jennie-O® turkey portfolio, the SPAM® family of products, Foodservice customized solutions business, Planters® snack nuts, Applegate® natural and organic meats, the bacon portfolio, and the Mexican foods portfolio.

For the fourth quarter of fiscal 2025, volume in the Retail segment was comparable to the prior year and declined in the International segment. For the fourth quarter of fiscal 2025, organic volume increased in the Foodservice segment. For the full year of fiscal 2025, organic volume in the Foodservice segment increased compared to the prior year. Volume declined in the Retail segment and was comparable to the prior year in the International segment for the full year of fiscal 2025.

In fiscal 2026, the Company expects net sales growth, which assumes growth across a broad range of categories, increased brand support and innovation, and market-based pricing actions. Risks to this outlook include slowing consumer demand and commodity price fluctuations.

Cost of Products Sold

Cost of products sold for the fourth quarter and full year of fiscal 2025 increased due to higher commodity input costs, mainly for pork bellies, beef, and nuts.

In fiscal 2026, the Company expects raw material costs for beef and nuts to remain above historical averages. Pork costs are anticipated to be lower than fiscal 2025 levels; however, they are expected to remain elevated compared to long-term averages. Inflationary pressures on employee-related, packaging, and production expenses are expected to persist at normalized levels. The Company’s T&M initiative is projected to continue delivering cost savings in fiscal 2026, with a focus on procurement of ingredients and supplies, production-related costs, and logistics.

Gross Profit

Gross profit as a percentage of net sales decreased in both the fourth quarter and full year of fiscal 2025 compared to the prior year. Each segment experienced a decline in gross profit as a percentage of net sales versus fiscal 2024. All segments benefited from cost savings generated through the Company’s T&M initiative, which were more than offset by inflationary pressures.

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In fiscal 2026, the Company expects gross profit as a percent of net sales to increase compared to the prior year. Incremental cost inflation and unfavorable sales mix pose the largest risks to this outlook.

Selling, General, and Administrative (SG&A)

SG&A for the fourth quarter of fiscal 2025 decreased due to proceeds from a legal settlement and lower advertising expe

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