The Hershey Company HSY released second-quarter 2018 results, wherein both top and bottom lines increased year over year and came ahead of the Zacks Consensus Estimate. Results gained from solid demand for the company's chocolate brands and Amplify's buyout. However, cost pressures continued to weigh on margins.
Well, Hershey has long been struggling with soft margins, which caused shares of the company to decline 14.2% in the past six months, in comparison to the industry
's drop of 12.7%. Nevertheless, the Zacks Rank #3 (Hold) company remains focused on lowering costs and improving margins through initiatives like its Margin for Growth program.
Earnings & Revenues
Adjusted earnings per share of $1.14 beat the Zacks Consensus Estimate of $1.10. Earnings increased 5.6% from the year-ago quarter. This could be accountable to higher sales and lower tax rate. Effective tax rate (on an adjusted basis) declined to 16% in the quarter, thanks to U.S. tax reforms.
Hershey Company (The) Price, Consensus and EPS Surprise
Hershey Company (The) Price, Consensus and EPS Surprise | Hershey Company (The) Quote
Consolidated net sales of $1,751.6 million rose 5.3% year over year. Top line also came ahead of the Zacks Consensus Estimate of $1,747 million. Acquisitions, volumes and net price realization benefited sales growth by 5.6 points, 1 point and 1.6 points, respectively. Currency translations had negligible impact on sales growth.
Adjusted gross margin declined 260 basis points (bps) to 44.5%, due to escalated freight and logistics expenses, adverse mix, greater trade and packaging investments, and incremental plant expenses associated with new production lines.
Total advertising and related consumer marketing expenses fell 7.2% in second-quarter 2018. Excluding this, selling, marketing and administrative costs rose 5.6% in the quarter. Hershey's efforts to lower foundation cost structure (through Margin for Growth plan) were more than offset by costs associated with Amplify's buyout and investment in the enterprise resource planning (ERP) system.
Consequent to these factors, adjusted operating margin contracted 140 bps to 19.4%.
North America (the United States and Canada) net sales improved 5.6% to $1,560 million, largely fueled by Amplify's acquisition. Hershey remains committed toward investing in key brands, alongside enhancing capacities in the dynamic landscape. The company is also making efforts to keep pace with the evolving consumer trends. Hershey's consumer-driven efforts like endeavors to tap holiday opportunities among others are expected to be significant contributors to the company's growth in the second half of 2018.
Net sales in the International and Other segment grew 3.1% to $191.7 million. Sales growth was backed by net price realization and volumes to the tune of 3.8 points and 1 point, respectively. Currency had an adverse impact on sales of 1.7 point. On a currency-neutral basis, net sales grew 15% from Mexico, Brazil and India on a combined basis. Notably, the company is on track with its business transformation in China. Moreover, management remains committed toward undertaking prudent international divestitures to streamline operations and shift focus toward enhancing the performance of its core Hershey's business across core markets and channels.
Hershey ended the quarter with cash and cash equivalents of $467.4 million, long-term debt of $3,249.7 million and total shareholders' equity of $1,063.8 million.
Also, Hershey raised its quarterly dividend by nearly 10% to 72.2 cents per share for Class A shares and 65.6 cents per share for Class B shares. This is payable on Sep 14, 2018 to shareholders of record as on Aug 24. Also, management authorized a new share buyback plan of about $500 million.
Management remains positive about investments in core brands in the United States. Also, it remains on track with the integration of Amplify, which delivered a robust show in the second quarter. Further, management remains impressed with the transformation of its international business, marked by strong organic growth, solid profit improvements, and sale of Tyrrells and Golden Monkey businesses.
All said, Hershey now expects net sales for 2018 to rise toward the low end of the updated band of 3.5%-5.5%. The net impact from buyouts and divestitures is now expected to be 3.5%, lower than 5% expected earlier. This revision is accountable to recent international business divestitures.
However, management reiterated its other forecasts. Organic sales are anticipated to grow at a rate that lies toward the low end of the slightly up to 2% increase range. Currency is likely to have a negligible impact on the company.
Adjusted gross margin is expected to decline nearly 125 bps, as adverse sales mix and elevated freight, logistics and packaging expenses are anticipated to more than offset gains from productivity and cost saving initiatives. Markedly, savings from Margin for Growth program are estimated between $80 million and $90 million in 2018.
Further, the company expects adjusted tax rate to be approximately 19% to 20%.
Finally, Hershey reaffirmed its adjusted EPS guidance at $5.33-$5.43, reflecting a 14-16% increase from 2017. The Zacks Consensus Estimate is pegged at $5.32.
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