Renowned Chocolate maker, The Hershey Company's
( HSY )
first-quarter 2013 adjusted earnings of $1.09 per share beat the
Zacks Consensus Estimate of $1.04 per share by 4.8%. Earnings also
rose 13.5% from the prior-year quarter driven by decent top-line
growth and solid margins in the quarter.
The adjusted earnings mainly exclude acquisition/integration
costs, pension costs and expenses related to Hershey's supply chain
and cost savings program, Project Next Century.
The company once again reaffirmed its full-year 2013 sales
outlook but raised its earnings guidance as it expects to gain from
increased marketing investments behind new products and
international markets and lower input costs and other cost savings
despite a challenging macroeconomic environment.
Revenues and Volume Growth
Hershey's net sales of $1.83 billion rose 5.5% from the
prior-year quarter, in line with management's expectation of being
within the long-term target of 5% to 7%. The first quarter faced
strong year-ago comparisons due to a shorter Easter season this
year in the U.S. versus last year. Despite headwinds from difficult
comparisons, Hershey delivered a decent volume growth. However, the
company's quarterly sales marginally missed the Zacks Consensus
Estimate of $1.835 billion.
Volume added 5.3 percentage points (pp)to revenue growth driven
by improving volume trends and market share gains of core brands in
the U.S. and the launch of Brookside brand products in the quarter.
The improving volume trends of core brands in the U.S. were driven
by increased advertising investments, consumer promotions and
innovation. The launch of Brookside brand products in the quarter
added 2.0 pp to the volume growth. Hershey acquired Brookside
Foods, a Canadian confectionary company, in January last year.
Pricing added a further 0.5 pp to revenue growth. Currency hurt
revenues by 0.3 pp, worse than a similar positive impact last
The company is consistently gaining market share in core U.S.
retail channels. For the 12 weeks ended Mar 23, 2013, Hershey's
U.S. CMG (Candy, Mint, Gum) retail takeaway in channels which
account for over 90% of the U.S retail business, grew 8.6% year
over year (excluding Easter seasonal activity in the year-ago and
current period). The market share in these channels grew 1.4 share
points over the same timeframe (including Easter seasonal activity
in the year-ago and current period). These channels include food,
drug, mass merchandisers including Wal-Mart Stores,
Inc . ( WMT
), and convenience stores.
Margins Go Up
Hershey's adjusted gross margin for the quarter expanded 240
basis points (bps) to 46.6%, driven by lower input costs, pricing
and productivity benefits, and improved efficiencies from supply
Excluding advertising, selling, marketing and administrative
expenses (SM&A) increased 9% in the first quarter of 2013.
However, the SM&A increase was lower than management's
Advertising spend increased by 22% over the prior-year quarter
due to increased marketing and promotional efforts and higher costs
to support the launch of Brookside branded. Operating margin
improved 70 bps in the quarter to 22.0% due to lower-than-expected
The company continuously invests in advertising and marketing
capabilities to build its brands globally. The company's brand
investments give it a competitive advantage and are one of the
principal reasons behind the company witnessing better volume
elasticity versus its peers.
2013 Earnings Outlook Updated
The company maintained its outlook for net sales growth to be
within its long-term targets of 5%-7% (including foreign exchange
impact). Volume growth of core brands in the U.S. and the expansion
of five core brands in international markets driven by increased
investments in advertising and go-to-market capabilities; increased
innovation such as Kit Kat Minis, Twizzlers Bites and Jolly
Ranchers Bites; and broader launch of Brookside brand products in
core retail channels in the U.S. are expected to help Hershey
achieve its sales targets.
Gross margins are expected to expand in 2013 by 190 to 210 bps
up from prior expectations of 180-200 bps, driven by input cost
deflation, productivity gains and costs savings.
The company expects SM&A expenses to increase year-over-year
slightly more than the first-quarter growth of 9% which is lower
than prior expectations of 9% to 11%. Advertising expenses (as a
percentage of revenue) are expected to increase 20% year over year
in fiscal 2013 (maintained), mainly to support the Brookside
product launch, new product launches in both the U.S. and
international markets and accelerated advertising investments in
key international markets. Specifically, the company will increase
promotional efforts for the Hershey's brand in China and Hershey's
Mais in Brazil.
The company upped its adjusted earnings guidance to a range of
$3.61-$3.65 per share from the prior expectation of $3.56-$3.63 per
share, despite planned increases in advertising and marketing
costs. The adjusted earnings guidance represents growth of about
12% year over year, higher than the prior expectation of growth in
the range of 10%-12%.
Other Stocks to Consider
Hershey carries a Zacks Rank #2 (Buy).Hershey's strong brand
positioning, strategic marketing investments in core brands,
disciplined innovation, and consumer capabilities make it
attractive. Some food companies that are currently doing well and
have a bright outlook include Flower Foods Inc. (
FLO ) carrying a
Zacks Rank #1 (Strong Buy) and Kellogg Company (
K ) carrying a Zacks
Rank #2 (Buy).FLOWERS FOODS (FLO): Free Stock Analysis ReportHERSHEY CO/THE (HSY): Free Stock Analysis
ReportKELLOGG CO (K): Free Stock Analysis ReportWAL-MART STORES (WMT): Free Stock Analysis
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