Chocolate maker The Hershey Company ( HSY )
posted third quarter 2012 adjusted earnings of 87 cents a share,
above the Zacks Consensus Estimate of 86 cents by a penny. Also,
earnings rose 3.6% from the prior-year quarter driven by revenue
growth and improved gross margins.
The adjusted earnings mainly excludes acquisition/integration
costs related to the Brookside acquisition, pension costs and
expenses related to Hershey's supply chain and cost savings
program, Project Next Century.
The company raised its earnings forecast for 2012 and provided
an encouraging financial outlook for 2013, which is expected to be
in line with its long-term targets.
Quarter in Detail
Hershey's net sales of $1.75 billion rose 7.5% from the
prior-year quarter, driven both by price and volume growth. Pricing
added 3.9 percentage points, whereas volume grew 2.1 percentage
A benefit of 2.3 percentage points from the January 2012
acquisition of Canadian confectionary company Brookside Foods was
partially offset by currency headwinds of 0.8 percentage point.
Quarterly sales were in line with the Zacks Consensus Revenue
For the 12 weeks ended October 6, 2012, Hershey's U.S. CMG
(Candy, Mint, Gum) retail takeaway in channels accounted for over
90% of the U.S retail business and it grew 5.9% year over year.
These channels include food, drug, mass merchandisers including
Wal-Mart Stores, Inc . ( WMT ),
and convenience stores. Meanwhile, market share improved 0.4 point
over the same timeframe driven by Hershey's core brands and product
Hershey is one of the largest U.S. confectioners and is well
known for chocolate products like Hershey's, Reese's and Kisses, as
well as non-chocolate confectioneries, such as Jolly Rancher candy,
Ice Breakers chewing gum, Breath Savers mints and Bubble Yum bubble
Hershey's adjusted gross margin for the quarter expanded 70
basis points (bps) to 43.2%, as pricing and productivity benefits
and improved efficiencies from supply chain initiatives offset
headwinds from rising input costs.
Excluding advertising, selling, marketing and administrative
expenses (SM&A) increased 12% in the third quarter of 2012. The
SM&A increase was lower than management expectations of an
increase of 15% to 20%.
Advertising spend increased 12% over the prior-year quarter as
the company continued with its aggressive marketing efforts both in
the U.S. and internationally. Operating margin declined 30 bps in
the quarter to 17.5%. In the quarter, the company raised its
dividend by 10.5%.
2012 Earnings Outlook Upped
For 2012, the company expects to record adjusted earnings in the
range of $3.22-$3.25 per share, up from prior forecast of
$3.17-$3.23 per share on improved gross margins and slightly higher
contribution from the Brookside acquisition. The adjusted earnings
guidance represents a growth range of 14%-15% year over year,
higher than prior expectation of growth in the range of
The 2012 net sales growth guidance (including the impact of
foreign currency headwinds) was narrowed to 8%-9% from prior
expectations of 7%-9%. The guidance includes 1.75 to 2.0 percentage
points benefit from the Brookside acquisition. Organic volume is
expected to accelerate in the fourth quarter as the company reaps
benefits from the Halloween and holiday season, which is already
off to a good start.
For 2012, gross margins are expected to expand between 120-140
basis points year over year, up from prior expectations of an
increase of 100-120 basis points. The gross margin guidance was
raised due to lower-than-expected increase in input costs. Input
costs in 2012 are however still expected to be higher than 2011
Advertising expenses (as a percentage of revenue) are expected
to increase 13% to 15% year over year in 2012. The guidance is
higher than prior expectations of an increase in low double digits
as the company plans an additional advertising investment in the
SM&A expenses, excluding advertising, are expected to rise
in a low double digit percentage rate for 2012 due to increased
investments in marketing capabilities in both the U.S. and
internationally. Full year tax rate is expected to be about
2013 Outlook Encouraging
For 2013, the company expects its adjusted earnings and net
sales growth rates to be within its long-term targets of 5%-7% and
8%-10%, respectively. Adjusted earnings are expected to range
between $3.48 and $3.58.
Investments in core brand marketing, regular product innovation,
productivity improvement and moderate commodity cost inflation are
expected to help it achieve these targets despite a challenging
macroeconomic environment. Gross margins are also expected to
expand in 2013 as input cost inflation subsides.
We currently have a Neutral recommendation on The Hershey
Company. The stock carries a Zacks #3 Rank in the near term (Hold
We are impressed by the company's out-performance in all the
three quarters of 2012. The company upped its earnings guidance for
the third time this year, highlighting its attractive earnings
potential. The 2013 outlook is also encouraging.
Moreover, the company's strong brand positioning, strategic
marketing investments in core brands, disciplined innovation, and
consumer capabilities make it attractive. However, lack of
significant presence outside U.S. keep us on the sidelines.HERSHEY CO/THE (HSY): Free Stock Analysis
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