Tyson Foods’ first fiscal quarter net income down more than 70%

Tyson Foods posted a net income of $316 million, or 88 cents a share, for the first fiscal quarter that ended Dec. 31. That was down more than 70% from the $1.12 billion, or $3.07 cents a share, it earned last year. Tyson also missed the consensus estimate of $1.35 per share.

Despite revenue growth of 2.5% to $13.26 billion, the Springdale-based company fell short of analysts’ predictions of $13.5 billion. The earnings miss was attributed to weaker results in three of Tyson’s major businesses: chicken, pork and beef. The company’s adjusted operating income for the quarter totaled $453 million, down 68.3% from a year ago.

“We faced some challenges in the first quarter. Market dynamics and some operational inefficiencies impacted our profitability,” Tyson Foods CEO Donnie King said about the earnings report posted Monday (Feb. 6). “We expect to improve our performance through the back half of fiscal 2023.

King said he has never seen Tyson’s diversified business have such challenges in the same quarter. Shares of Tyson Foods (NYSE: TSN) fell nearly 5% Monday to $61.02 per share in heavy volume early in the trading day.

SEGMENT RESULTS
Beef has literally been Tyson’s cash cow for several years, but higher live cattle prices and falling beef prices crushed packer margins in the quarter. Beef sales revenue was $4.723 billion in the quarter, up 2.9% on volume but down 8.5% on price. The beef segment had an adjusted operating income of $129 million, down from $956 million a year ago. The operating margin fell to 2.7% from 19.1% year over year.

King said while Tyson has expected the beef business to come under pressure, its margins declined more than expected despite good demand overall. He said as the cattle cycle moves toward its trough, Tyson expects operating margins to range between 2% to 4% for the balance of the year, which is down sharply from the 6% to 8% guidance the company gave last quarter.

Tyson’s chicken business also had a disastrous quarter, posting an adjusted operating income of $77 million, down 34% from $117 million a year ago. The operating margin fell to 1.8% from 3% as Tyson said it failed to manage supply with demand. Tyson had too much chicken in the fresh retail category and not enough in other areas, such as food service and frozen.

King said the miss in chicken was two-thirds attributed to changing market dynamics and one-third its own fault by not acting quickly enough. The snafu prompted a management change as King recruited Wes Morris to replace David Bray, who held the role for about 15 months. King said he made the management change after Tyson incurred substantial losses from selling fresh chicken too cheap to move it and, at the same time, had to buy chicken to fill other orders where the inventories were short.

Morris said at the macro level, Tyson’s chicken production was spot on with demand. But the company had too much fresh chicken in retail and not enough in other areas of the business. King said Tyson was also trying to rebuild stock levels of fresh chicken that had failed to keep up with demand the prior two years. He said there was also more pork and beef on the market, and consumers bought less fresh chicken that had gone up in price.

Tyson’s chicken sales totaled $4.263 billion, up 10% from a year ago, with average prices up 7.1% while volume sales were up 2.5%. King said it will likely take another quarter to work through the self-inflicted wounds before the segment provides better results. Tyson reduced its margin guidance from 6% to 8% to 2% to 4% for fiscal 2023.

Tyson’s pork business had an operating loss of $19 million compared to an income of $164 million a year ago. The operating margin was down 1.2%, a wide swing from a 10.1% gain in the year-ago period. Pork sales were $1.529 billion, down 7.4% on volume and up 1.4% in price. Tyson also reduced its pork operating margin from 0% to 2% for the fiscal year, roughly half of the previous forecast.

The bright spot in Tyson’s report was the prepared food business which posted sales of $2.538 billion, up 1.2% on volume and up 7.6% on price. The diverse prepared foods segment had an operating income of $266 million, up 43% year over year. Operating margins rose to 10.5%, which is the one business win in which Tyson did not adjust margins for the fiscal year.

MIXED FORECAST
King also said Tyson is on track to deliver on the $1 billion productivity savings program one year ahead of schedule. Tyson said it realized more than $700 million in savings last year. King said Tyson will meet the 3-year goal by year-end 2023.

Tyson also said it expects total sales to range between $55 billion and $57 billion in the fiscal year despite the slow start. King said Tyson’s plants are fully staffed, and the investments in workers are paying off. He said other synergies will be gained by consolidating its headquarters to Springdale. The company announced in October 2022 plans to consolidate corporate offices in Springdale. That impacts roughly 1,000 jobs from the Tyson Fresh Meats business in Dakota Dunes, S.D., and the Chicagoland area’s Hillshire Brands offices and marketing positions.

While he declined to give the number of employees making the move to Springdale, he did not dispute it will be approximately 500, which had previously been reported in the media. He said the number is about what Tyson expected, and some employees are still trying to make the move work in their family dynamics.

He also told Talk Business & Politics that investments in automation and digitization will continue to help drive efficiencies that lead to more net income in the long run. He had no comment on the departure of Chief Technology Officer Scott Spradley but said the company was looking to fill his duties from within.

Wall Street remains skeptical of Tyson’s near-term earnings potential.

Ben Bienvenu, an analyst with Stephens Inc., reiterated his “buy” rating on Tyson Foods following the earnings miss. Bienvenu’s expectations were below consensus, but he said the miss was much worse than he anticipated.

“While we are certainly glad they lowered the bar for the year, the implied earnings power is quite a bit lower than we expected, with guidance now pointing to something likely in the low $4 range for fiscal year 2023. Earnings are at a trough, and we think the stock should continue to be interesting to longer-duration investors. Still, shares lack a near-term catalyst,” Bienvenu told investors on Monday. (Stephens Inc. conducts investment banking services for Tyson Foods and is compensated accordingly,)