Renowned chocolate maker,
The Hershey Company's
) fourth quarter 2012 adjusted earnings of 74 cents a share
missed the Zacks Consensus Estimate of 75 cents by a penny.
Top-line growth was offset by operating margin declines and
rising advertising expenses, thus causing the earnings miss.
Earnings, however, rose 5.7% from the prior-year quarter.
The adjusted earnings mainly exclude acquisition/integration
costs related to the Brookside acquisition, pension costs,
impairment charges related to the investment in a Colorado
company, and expenses related to Hershey's supply chain and cost
savings program, Project Next Century.
Interestingly, the company raised its full year 2013 earnings
outlook as it expects to gain from lower input costs and other
Quarter in Detail
Hershey's net sales of $1.75 billion rose 11.7% from the
prior-year quarter driven by volume growth, which was boosted by
holiday-driven spending. Volume added 7.0 percentage points to
revenue growth, significantly better than last quarter's 2.1
percentage point; in line with management expectations of posting
sequentially better volume growth in the quarter.
Pricing added 2.3 percentage points. Currency benefited
revenues by 0.3 percentage points, much better than the negative
impact seen in the last few quarters. The Jan 2012 acquisition of
Canadian confectionary company, Brookside Foods benefited revenue
by 2.1 percentage points. Quarterly sales also beat the Zacks
Consensus Revenue Estimate of $1.71 billion.
The company is consistently gaining market share in core U.S.
retail channels. For the 12 weeks ended Dec 29, 2012, Hershey's
U.S. CMG (Candy, Mint, Gum) retail takeaway in channels, which
account for over 90% of the U.S retail business, grew 7.0% year
over year. The market share in these channels grew 1.2 share
points over the same timeframe. These channels include food,
drug, mass merchandisers including
Wal-Mart Stores, Inc
), and convenience stores.
Hershey's adjusted gross margin for the quarter expanded 140
basis points (bps) to 43.1%, as pricing and productivity benefits
and improved efficiencies from supply chain initiatives offset
the headwinds from rising input costs.
Excluding advertising, selling, marketing and administrative
expenses (SM&A) increased 19% in the fourth quarter of 2012.
The SM&A increase was higher than management's expectations
due to increased investments in marketing capabilities in both
the U.S. and internationally.
Advertising spend increased substantially by 27% over the
prior-year quarter as the company continued with its aggressive
marketing efforts for both new as well as established brands.
Operating margin declined 60 bps in the quarter to 15.8% due to
higher SM&A and advertising costs. Last quarter, the company
had already announced plans for an additional advertising
investment in the fourth quarter.
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.
In fiscal 2012, the company witnessed a 9.3% increase in
revenues to $6.6 billion, in line with the Zacks Consensus
Estimate. The net sales growth rate marginally beat the company's
expectations of an improvement in the range of 8%-9%.
Adjusted earnings were $3.24 per share, which were in line
with the Zacks Consensus Estimate and also near the higher end of
the company's guidance range of $3.22-$3.25. Earnings increased
14.5% from the prior year.
2013 Outlook Updated
The company maintained its outlook for net sales growth to be
within its long-term targets of 5%-7%. Volume growth of core
brands driven by the increased promotional efforts; increased
innovation; and introduction of Brookside brand products in core
retail channels in U.S. are expected to help Hershey achieve its
Gross margins are expected to expand in 2013 by 180-200 basis
points as input cost inflation subsides. Productivity gains and
costs savings will also boost margins.
The company expects SM&A expenses to increase in fiscal
2013, at a higher rate than net sales. Advertising expenses (as a
percentage of revenue) are expected to increase 20% year over
year in fiscal 2013, mainly to support the Brookside product
launch, new product launches in both U.S. and internationally,
and increased promotional efforts for the Hershey's brand in
The company upped its adjusted earnings guidance to a range of
$3.56-$3.63 from the prior expectation of $3.48-$3.58. The
adjusted earnings guidance represents growth range of 10%-12%
year over year, higher than the prior expectation of growth in
the range of 8%-10%.
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.
Other Stocks to Consider
Hershey's carries a Zacks Rank #3 (Hold).Some consumer staples
companies that are currently doing well and have a bright outlook
ConAgra Foods, Inc.
). Both the companies have a Zacks Rank #2 (Buy).
CONAGRA FOODS (CAG): Free Stock Analysis
HERSHEY CO/THE (HSY): Free Stock Analysis
KELLOGG CO (K): Free Stock Analysis Report
WAL-MART STORES (WMT): Free Stock Analysis
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