Del Monte Foods Co. (DLM), the leading manufacturer and marketer of processed foods, tuned down its fiscal 2011 net sales growth outlook at its Investor and Analyst Day held on July 13, 2010. The company attributed the lowered guidance to its plans to shift from marketing to trade spend in order to maintain its momentum and protect market share in a difficult macro environment.
Del Monte has trimmed the lower end of its fiscal 2011 net sales guidance. It now expects net sales growth for fiscal 2011 to be in the range of 2% to 4% compared with its previous guidance of 3% to 4%, which was previously announced during its fourth quarter fiscal 2010 earnings call on June 10, 2010.
The company intends to focus on new product launches as well as on the development and expansion of its pipeline to achieve its projected top-line growth. It plans to maintain price points, remain competitive in its price gaps, driving volume through marketing support, product innovation and by enhancing strategic partnerships.
The company has, however, remained firm on its stand to deliver earnings per share (EPS) in the range of $1.38 to $1.42 in fiscal 2011. Compared with the fiscal 2010 EPS of $1.30, this is in line with Del Monte’s annual long-term EPS growth target range of 7% to 9%. The Zacks Consensus Estimate for Del Monte currently stands at $1.41, implying that the analysts expect Del Monte to deliver EPS near the upper end of its guidance.
Del Monte also maintained its cash flow guidance range of $260 to $270 million, up from the cash flow of $251 million generated in fiscal 2010. Cash flow will be utilized for share repurchase, mergers, dividend and debt payback.
Del Monte’s investor presentation highlights the strength of its Pet Products business, which is expected to report stronger growth versus the Consumer business line. The category has a compounded annual growth rate (CAGR) of 8% (approximately) over the last four years compared with Consumer products’ CAGR of 5%. It also has a lower penetration of private label.
The company believes there are favorable consumer trends within Pet Food and sees potential expansion of pet snacks consumption. This bodes well for Del Monte as pet snacks is a higher growth and higher margin category product, in which the company holds the number 1 position (with its Milk-Bone and Pup-Peroni brands).
Del Monte Foods had posted diminutive top-line and earnings results in fourth-quarter 2010, a 13-week quarter ending on May 2, 2010. Earnings slipped to 31 cents from 35 cents a share in the year-ago period but exceeded the Zacks Consensus Estimate by 9 cents. The quarter highlights a 64% increase in marketing investment, consistent with the company’s Accelerated Growth Plan and a decline in top-line growth, offsetting savings from productivity initiatives.
However, a positive top-line growth, improvement in costs, partially offset by a 54% rise in marketing investment, increased earnings by 76% to $1.30 in fiscal 2010 from 74 cents in fiscal 2009. The year’s results met the Zacks Consensus Estimate of $1.30.
During the quarter, Del Monte’s total sales dipped 9.8% to $954 million, compared with $1,057.4 million year-ago period, reflecting a decrease in volume due to one extra week in the fourth quarter of fiscal 2009. In contrast to the quarter’s results, total sales climbed 3.1% to $3,739.8 million in fiscal 2010 owing to strong base unit volume gains across the portfolio, partially offset by one extra week in fiscal 2009 and increased trade spend.
We expect Del Monte to perform well in the coming quarters, fueled by higher-quality marketing, new product innovation, better customer service and intense focus on cost control. Its higher growth and margin segment, Pet Product’s results will continue to benefit from to the increase in pet ownership among American households. We thus maintain our Outperform rating Zacks #1 Rank (Strong Buy) on Del Monte.
Del Monte shares fell 2.3% or 33 cents to $14.39 on the news.
San Francisco, California-based Del Monte Foods produces, distributes, and markets branded and private label food and pet products for the U.S. retail market. The company operates in North America, Mexico, American Samoa and Venezuela. Del Monte sells its products to grocery chains, club stores, retail markets, mass merchandisers, the United States military, export markets, the foodservice industry and food processors through a direct sales force and independent food brokers.
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