On Sep 2, we issued an updated research report on
The Hershey Company
Hershey's second-quarter adjusted earnings of 76 cents per
share, reported in July, were in line with the Zacks Consensus
Estimate and also within the preliminary range released a week
before. Earnings grew 5.6% from the prior-year quarter as lower
advertising costs made up for weak gross margins and
lower-than-expected sales in the U.S.
Increasing competition from competing snacking categories, less
consumer shopping trips and consumer weakness hurt U.S. sales.
Competition for Hershey's has become tougher than it was over the
past few years.
Hershey's first half top-line performance was below expectations
due to abnormal shopping patterns, increased competition in the
confectionery category, continued challenging macro environment and
softer international growth.
Moreover, the dramatic increase in dairy costs this year has
severely hurt Hershey's gross margins in the first half of the
year. The overall cost environment for food commodities is expected
to be under pressure in 2014/2015 due to imbalance in domestic and
worldwide agricultural supply and demand, and other macroeconomic
factors. In response to the rising commodity costs, management
raised wholesale prices by approximately 8% across its instant
consumable, multi-pack, packaged candy and grocery lines, effective
from Jul 15.
Management lacks visibility on further dairy cost rise in 2014,
forcing it to lower gross margin expectations twice this year. In
fact, management now expects its fiscal 2014 results to be at the
lower end of its long-term targets due to greater-than-anticipated
commodity cost headwinds.
However, management expects sales to pick up in the second half
on the back of solid seasonal growth, new product launches and
greater levels of merchandising, programming and innovation.
Moreover, the latest price increase is notable and should boost
sales and profits in 2015.
Overall, Hershey's strong brand positioning, strategic marketing
investments in core brands, disciplined innovation and consumer
capabilities make it attractive.
Other Stocks to Consider
Hershey carries a Zacks Rank #4 (Sell). Better-ranked food
stocks include ConAgra Foods, Inc. (
), J&J Snack Foods Corp. (
) and The Hain Celestial Group, Inc. (
). All the three stocks carry a Zacks Rank #2 (Buy).
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