Retail sales account for almost three quarters of the $4 billion meat-centric food company's total sales.
With a large percentage of its sales already in the meat business, Hillshire Brands hopes to be "the most innovative meat-centric food company in the U.S."
“We are the Hillshire Brands Co.,” CEO Sean Connolly told analysts at a conference last September. “We are not Sara Lee, and we are a new management team.”
Hillshire’s predecessor company, Sara Lee Corp., has been reinventing itself for years. Over the 1980s and 1990s, the Chicago company built itself into a classic conglomerate: under the leadership of then-CEO John H. Bryan, Sara Lee acquired numerous non-food companies, and in addition to its food lines was also a maker of such diverse products as Hanes underwear, shoe polish, and Coach leather goods.
By 2000, however, the company was showing signs of difficulties due to the acquisition binge. With a hand in so many different industries, managing various distribution channels, customers, products and employees made it difficult for Sara Lee to operate profitably and effectively.
The company, widely criticized as an underperformer, then began divesting assorted parts of itself to better focus its resources. The culmination of that years-long streamlining effort came last year, when the company spun off its coffee and tea business and adopted the Hillshire name. It still carries frozen Sara Lee cheesecake and other baked goods, but that's minimal: Hillshire is mainly about meat.
With a new name and new top management, the company now hopes to become “the most innovative meat-centric food company in the U.S.” To that end, it has focused on increasing investment in its well-known brands – including Jimmy Dean sausage and Ball Park hot dogs – cutting costs, and rolling out new products that extend existing brands.
And so far, the makeover appears to be going well for Hillshire Brands. In the past six months, Hillshire shares have climbed a solid 25 percent, easily outperforming the S&P 500 Index’s just over 5 percent growth in the same period.
Connolly joined Sara Lee in January 2012 after working 10 years at New Jersey-based Campbell Soup Co., where he was president of the company’s $4.6 billion North American business.
Since it became a free-standing company in late June, Hillshire also hired a new advertising agency, Young & Rubicam Group; and has put together a new marketing team, which is already making progress on packaging and product changes.
“We like management’s strategy – to grow by investing in itself – and we have seen this plan work previously (e.g. Hershey a few years back),” said JPMorgan Chase and Co. analysts Ken Goldman and Priscilla Tsai in a research note last August. In a January commentary, the analyst added, “We believe the company’s investments in R&D and marketing will pay off with healthy top-line results.”
In the past, the company has typically invested 3.5 percent of its sales into marketing, advertising and promotions but plans to increase that amount to 5 percent by fiscal 2015.
“Importantly, fiscal '13 is a foundational year for us. That means we're taking foundational steps like upgrading our capabilities and team, fixing some underperforming businesses, reestablishing our commitment to advertising and rebuilding the innovation pipeline,” said Connolly in a conference call.
Hillshire Brands strongest brands, such as Jimmy Dean, account for 85 percent of total retail revenues. While in the past the focus has been on cost cutting, the company is now shifting its attention toward building on and investing in these classic brands.
“Connolly has a solid grasp on the source of Hillshire’s moat, namely its brand equity,” said Associate Analyst Ken Perkins of Chicago–based investment research firm Morningstar Inc. in a research note.
Hillshire Brands' sales, as a subcategory of Sara Lee, grew 4 percent, to $4 billion, in fiscal 2012 largely because of price increases. Nonetheless, the company is targeting sales growth of 4 to 5 percent and volume growth of 2 to 3 percent by fiscal 2015.
In a mature and highly competitive marketplace, however, the company also faces several challenges in the future -- not the least of which being its strategy might not work.
“The turnaround story may not take hold,” Goldman and Tsai have cautioned investors, and and they’ve also noted that “innovation may not be as strong as expected.”
Goldman and Tsai have a target price of $33.00 and an “overweight” rating. Fiscal year 2013 operating net income is estimated at $201 million, or $1.65 earnings per share.
Hillshire Brands failed to answer repeated phone calls and emails seeking comment.
Weak consumer sentiment is another key risk the company could face, according to Spin-Off Advisors LLC in a June research note.
Hillshire Brands is also battling with companies, like Kraft Foods Group Inc. and Hormel Foods Co., with consistently high operating margins. But profits could get some help if pork prices remain low for a longer period than expected, and experts say Hillshire is relatively well positioned to withstand pressure from low-cost private-label rivals.
“Kraft took the opportunity to gain prominence with its Oscar Meyer Select deli meats over the past few years, which leaves Hillshire playing catch up,” said Perkins.
Since its creation in June, analysts have been bumping their profit forecasts higher. In the past 52 weeks the company’s shares have traded as high as b $30.99, and as low as $24.31. At the mid-day Tuesday price of $32.30, the company’s current trailing price-earnings ratio is 5.48, far below the S&P 500 index P/E of 16.98.
For fiscal 2013, Hillshire Brands expects sales to be roughly flat ’s adjusted $4.04 billion, Adjusted per-share earnings are expected to be between $1.40 and $1.55. Officials expect commodity costs to be more favorable in the first half of 2013.
"It is still in early days," said Connolly at a February conference. "We are quite encouraged by the progress we see in the business and within our company culture."