Hershey's Cost-Saving Plan Solid, High Costs Hurt Margins

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The Hershey Company'sHSY cost-cutting initiatives and productivity investments have been able to mitigate weak top-line performance to a great extent. The company's latest cost-saving program, Margin for Growth, is expected to boost profits and will be reflected in the to-be-reported quarter. As part of this multi-year program, the company will reduce workforce outside the United States by 15%. The program is intended to improve overall operating margin through supply chain optimization, a streamlined operating model and reduced administrative expenses. Savings from these initiatives will be achieved in 2018 and 2019.

These initiatives will enable Hershey to achieve adjusted operating profit margin target of about 22% to 23% by 2019. The company will incur pre-tax charges of $375 million to $425 million and provide benefits between $80 million and $100 million from the layoffs. The savings from Margin for Growth program in 2018 are estimated between $80 million and $90 million, implying an increase of approximately $25 million from the initial projection. The company expects to generate cost-savings at the high end of the $150 million to $175 million target by 2019-end.

Apart from cost-saving initiatives, Hershey's foray in key global markets and increased focus on product innovation bode well.

Gaining Traction in International Market

Hershey is expanding its business in key global markets to bolster international presence. The company is making measured investments in core markets of Mexico, Brazil and India, where it is witnessing solid marketplace gains. Hershey is steadily activating its five core brands in these markets. Constant-currency net sales in Mexico, Brazil and India increased 12% in the first quarter of 2018 and 11% in 2017.

Among the emerging countries, the company's primary focus is on China. The country has one of the largest consumer bases considering the growing number of middle-class and affluent households. The company plans to add additional manufacturing capacity and resources to boost growth in the region. It started the implementation of the Margin for Growth Program in the second quarter of 2017 to optimize the manufacturing operations to support the China business. Constant-currency net sales were up approximately 1% in the first quarter.

Focus on Innovation

Hershey regularly brings innovations in core brands to cater to consumers' demand. The company strategically creates a unique and holistic portfolio for every season, which can meet consumers' seasonal shopping needs. Hershey's core chocolate brands, Reese's, Hershey's, Kit Kat and Kisses, continue to drive growth. Also, Hershey's Cookie Layer Crunch's have been performing well. The company expects innovative products to help it achieve long-term net sales growth target of 2% to 4%.

High Cost Hurts Margins

The increased costs related to packaging initiatives are hurting margins. Cost hikes also include unfavorable sales mix and fixed-cost absorption of overhead given lower volumes, unexpected manufacturing variances, higher freight and distribution costs and other supply chain expenses. This is expected to weigh on margins in 2018.

In the first quarter of 2018, adjusted gross margin declined 260 basis points due to unfavorable sales mix, higher freight and logistics costs as well as incremental investments in trade and packaging.

Hershey Company (The) Price

Hershey Company (The) Price | Hershey Company (The) Quote

Zacks Rank & Stocks to Consider

Hershey carries a Zacks Rank #3 (Hold).

A few better-ranked stocks in the Zacks Consumer Staples sector are United Natural Foods, Inc UNFI , Conagra Brands Inc CAG and Lamb Weston Holdings Inc LW , each carrying a Zacks Rank #2 (Buy). You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here .

United Natural's expected earnings growth for fiscal 2018 is 20.6%.

Conagra Brands earnings are expected to grow 17.8% in fiscal 2018.

Lamb Weston Holdings surpassed earnings in all of the past four quarters, the average beat being 11%.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing , Business , Stocks
Referenced Symbols: UNFI , HSY , CAG , LW

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