Del Monte Says "Sorry, Charlie"

Del Monte Foods' (NYSE: DLM) fourth-quarter earnings results resembled those competitor H.J. Heinz (NYSE: HNZ) delivered last week: double-digit sales growth and strong profit gains. But Del Monte seems to think the party may be over for food retailers. Its outlook for fiscal 2009 doesn't look too peachy.

Del Monte posted highly respectable results for the quarter, highlighted by an 11.1% increase in revenue and a 37.3% earnings increase. COGS slightly outpaced sales with an increase of 12.7%, which isn't surprising, considering ongoing commodity-price jumps. Del Monte did a great job of controlling SG&A costs, with these expenses actually slightly dipping as a percentage of sales for the quarter.

However, Del Monte doesn't paint a delicious picture going forward, with projected net sales growth of 5% to 7% for FY 2009 (versus 9.4% for FY 2008). Del Monte also forecasts that increasing costs will not be offset by pricing and cost-control initiatives. No product seems safe as Del Monte attempts to strengthen its portfolio. Last month, the company announced plans to sell StarKist tuna (and its beloved spokesperson Charlie), partly because of "highly sensitive price elasticity."

Del Monte has cited high seafood prices as a problem in the past, but I have to wonder whether it ever fully integrated StarKist into its operations after purchasing the brand from Heinz. While the product is a canned good like Del Monte's fruit and veggie options, StarKist tuna may not have complimented its existing product mix as well as the company hoped.

Considering today's economic climate, food retailers such as ConAgra (NYSE: CAG), Hormel (NYSE: HRL), and Kraft (NYSE: KFT) have posted especially strong results lately, with Campbell Soup (NYSE: CPB) as a notable exception. Del Monte has exceeded low growth expectations in the past, so it may have more pricing power than it projects. However, it's more likely that the company can't contain rising food prices indefinitely. Eventually, its growth will take a hit.

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