The Hershey Company
) posted first quarter 2012 adjusted earnings of 96 cents a share,
handsomely beating the Zacks Consensus Estimate of 81 cents. Also,
earnings jumped 31.5% from the prior-year quarter, driven by solid
revenues and improved margins despite rising input costs and a
difficult macro-economic environment.
Quarter in Detail
Hershey's net sales of $1.7 billion rose 10.7% from the
prior-year quarter, mainly buoyed by increased pricing. Benefits
from pricing (10.9 percentage points) ) and the January 2012
acquisition of Canadian confectionary company, Brookside Foods (0.7
points) were partially offset by volume declines (0.5 points) and
foreign exchange headwinds (0.4 points).
However, decline in volume was significantly lower than company
expectations due to a solid Easter season. Quarterly sales also
beat the Zacks Consensus Revenue Estimate of $1.66 billion.
Hershey's adjusted gross margin for the quarter expanded 180
basis points (bps) to 44.2%, as pricing and productivity benefits
and improved efficiencies from supply chain initiatives offset
headwinds from rising input costs. Unlike Hershey, rising input
costs and volume declines have crippled most food companies,
leading to margin declines despite improvement in revenues.
Advertising spend increased 14% over the prior-year quarter as
the company continues with its aggressive marketing efforts for
established as well as newly launched brands, both in U.S. and
Operating margin expanded 290 bps in the quarter to 21.3%,
fueled by declines in other selling, marketing and administrative
(SM&A) expenses, which offset headwinds from increased
In the quarter, the company repurchased shares worth $125
million against last year's repurchase authorization of $250
For 2012, the company expects to record adjusted earnings in the
range of $3.11-$3.17 per share. The guidance mainly excludes the
acquisition/integration costs related to the Brookside acquisition
and expenses related to Hershey's supply chain and cost savings
program, Project Next Century.
Management continues to expect its total adjusted pre-tax
charges and non-recurring project implementation costs related to
the Project Next Century program to be $150 million to $160 million
for 2012. Overall, adjusted earnings per share are expected to grow
in the range of 10-12% year over year versus prior expectations of
a growth in the range of 9-11%.
The 2012 net sales growth guidance (including the impact of
foreign currency) was raised from a range of 6.5-8.5% to 7-9%. The
new guidance however includes expected revenues of $90 million from
the Brookside acquisition. Organic volume is expected to be up
slightly for 2012.
For 2012, gross margins are expected to expand between 90-100
basis points from 2011 levels, also up from prior expectations of
an increase of about 75 basis points. The gross margin increase is
despite expectations of higher input costs in 2012 versus 2011 to
be driven by cost savings and pricing gains.
As previously guided, advertising expenses (as a percentage of
revenue) are expected to increase in low-double digits in 2012 as
the company invests in core brand marketing, launches new products
and conducts advertising campaigns for some recently launched
brands like Jolly Rancher and Rolo.
We currently have a Neutral recommendation on The Hershey
Company. The stock carries a Zacks #3 Rank in the near term (Hold
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