RICHMOND, Va. (AP) — Smithfield Foods Inc. said Tuesday that lower profit margins on fresh pork and higher selling costs drove the world's biggest pork producer's first-quarter net income down about 25 percent, despite gains in its packaged meats business.
Pork producers like Smithfield are caught in a tug of war with consumers. The company needs to raise prices to offset rising commodity costs, namely the corn it uses for feed. But consumers are still extremely sensitive to price changes in the current economy. By raising prices, Smithfield risks cutting into its sales should consumers cut back or buy cheaper meats, such as chicken.
In a conference call with investors, CEO C. Larry Pope said consumers are going to have to adjust to rising prices, causing them to re-evaluate how to spend their money.
"Consumers are going to see some prices on some products that they've not seen before," Pope said. "If you've got sticker shock on pork, you have a heart attack when you look at beef."
The Smithfield, Va.-based company, whose brands include Armour, Farmland and its namesake, saw higher supplies and weak U.S. retail demand hurt its fresh pork business in the first quarter, which is historically the segment's most difficult period. Fresh pork operating margins fell 1 percent in the first quarter from 3 percent a year ago, but the company said margins have improved considerably since the end of the quarter.
However, Smithfield Foods said volume for its packaged meats products such as deli meats, bacon, sausage, and hot dogs grew 4 percent during the quarter, and margins increased 10 percent. The company said it also saw gains in its international segment despite weaker currencies. It cost of sales rose nearly 3 percent, and its gross profit fell more than 18 percent.
"I'm fully aware that we're in uncertain times, and I know there will be more hurdles to jump," Pope said. "While I don't expect record profits this year, I do think we will deliver another solid year, driven by success in our packaged meats."
The company said it earned $61.7 million, or 40 cents per share, for the three months ended July 29, down from $82.1 million, or 49 cents per share, a year ago.
Analysts surveyed by FactSet expected earnings of 45 cents per share.
Revenue in the first quarter remained relatively flat at $3.09 billion and below Wall Street expectations of $3.16 billion.
Its shares rose 7 cents to $19.39 in afternoon trading. Its shares have traded in a 52-week range of $17.55 to $25.12.
Smithfield also said Tuesday it repurchased 7.4 million shares for $145 million in the first quarter.
