The Hershey Company
) second-quarter 2014 results were in line with the preliminary
numbers announced last week. Moreover, management continues to
expect its fiscal 2014 results to be at the lower end of its
long-term targets due to higher-than-expected dairy costs, as
announced last week.
Hershey's second-quarter adjusted earnings of 76 cents per share
were in line with the Zacks Consensus Estimate and were within the
preliminary range of 75 to 77 cents released last week.
Earnings grew 5.6% from the prior-year quarter as lower brand
building and advertising costs made up for weak gross margins and
lower-than-expected sales in the U.S.
The adjusted earnings mainly exclude acquisition/transaction
costs, pension income, and expenses related to Hershey's supply
chain and cost savings program - Project Next Century.
The Hershey Company - Earnings Surprise |
Revenues Improve Sequentially; U.S. Sales Soft
Net sales of $1.58 were also in line with the Zacks Consensus
Estimate. Net sales increased 4.6% year over year in line with the
preliminary numbers. Positive volume growth and market share gains
pulled up the top line.
However, though sales improved sequentially from a weaker first
quarter, performance in the U.S. fell short of management's
expectations due to soft retail trends. In the U.S., sales
Currency hurt revenues by 0.7 percentage points, lower than the
last quarter. Organically, sales increased 5.3% in the quarter.
High Dairy Costs Severely Dent Gross Margins
Hershey's adjusted gross margin for the quarter declined 230
basis points (bps) to 45.4%, due to higher input costs, mainly
dairy and an unfavorable sales mix, which offset productivity gains
and improved efficiencies from supply chain initiatives.
The costs of Hershey's key ingredients like dairy, nuts, cocoa
and sugar have increased dramatically so far this year and are
expected to rise further in the coming quarters.
The higher costs are expected to dent the company's margins
which prompted the guidance cut last week (discussed below). The
costs of other inputs - packaging, fuel, utilities and
transportation - are also rising.
In fact, in 2014/2015, the overall cost environment for food
commodities is expected to be under pressure due to domestic and
worldwide agricultural supply and demand imbalance and other
Excluding advertising, selling, marketing and administrative
expenses (SM&A) were almost flat in the second quarter of 2014
as gains from a foreign exchange currency contract offset higher
selling and employee related costs. SM&A includes investments
in non-advertising brand-building and go-to-market capabilities in
both the U.S. and international markets.
Advertising spend declined around 5% from the prior-year
quarter. Despite lower advertising costs, operating margin declined
60 bps in the quarter to 17.7% due to weak gross margins.
Last week, the company announced price increases for its
chocolates and candies in response to rising input costs of its key
ingredients. As a result, the company announced that it expects its
fiscal 2014 results to be at the lower end of its previous
Effective from Jul 15, the company raised wholesale prices by
approximately 8% across its instant consumable, multi-pack,
packaged candy and grocery lines. Direct buying customers will be
exempted from the raised prices until Aug 12.
Management does not expect the price increases to have any
material positive impact on 2014 results.
However, in anticipation of volume elasticity due to price
rises, management lowered its top-line expectations last week. 2014
net sales growth guidance was reduced to the lower end of the
long-term target range of 5-7% (including currency headwinds).
Previously, the company was expecting it to remain within the
Adjusted earnings for 2014 are also expected at the lower end of
the previously provided range of $4.05-$4.13. 2014 adjusted
earnings per share growth will be around the lower end of its
long-term target of 9-11% versus prior expectation of its remaining
within the range.
Moreover, gross margins are expected to decline slightly from
the year-ago levels due to greater-than-anticipated commodity cost
headwinds. Previously, Hershey expected gross margins to increase
around 20 bps. The gross margin guidance cut last week was the
second time this year that Hershey slashed the figure. At the
first-quarter conference call, the company lowered gross margin
expectations from a 50 bps rise to 20 bps in anticipation of higher
dairy costs and a less favorable sales mix. Commodity costs are
expected to be higher in 2014 than the last year.
It seems management is trying to combat the sharp rise in input
costs through reduced advertising spend.
Concurrent with the second-quarter press release, management
lowered the advertising expense (as a percentage of revenues)
guidance from a mid single-digit range to a low single-digit range.
The company will continue to incur advertising costs to support
core brands as well as product launches in both U.S. and
international markets. SM&A (excluding advertising) expenses
are expected to increase at a lower rate than the top line.
The financial outlook excludes benefits from the pending
Shanghai Golden Monkey acquisition (expected to close in the second
Other Stocks to Consider
Hershey carries a Zacks Rank #4 (Sell).Better-ranked food stocks
Treehouse Foods, Inc.
Pinnacle Foods Inc.
).While Treehouse Foods sports a Zacks Rank #1 (Strong Buy), Pepsi
and Pinnacle Foods have a Zacks Rank #2 (Buy).
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