Hershey's (HSY) Margin for Growth Plan to Drive Q2 Earnings

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The Hershey CompanyHSY is scheduled to release second-quarter 2018 results on Jul 26. We expect the company to continue gaining from its cost-saving and productivity improvement efforts. Focus on innovation and brand enhancing initiatives are also likely to drive Hershey's performance amid hurdles.

Hershey Company (The) Price and EPS Surprise

Hershey Company (The) Price and EPS Surprise | Hershey Company (The) Quote

Hershey, one of the largest chocolate manufacturers in the world, has a mixed earnings surprise record. Let's see what's in store for the company this time around.

Will Cost Woes be Offset?

Hershey remains poised to gain from its focus on core confection business, concentration on expanding snacking category, and efforts to overcome cost hurdles and improve margins. Talking of cost woes, Hershey witnessed escalated freight and logistic expenses in the first quarter of 2018, while it also made greater investments related to trade and packaging. This, along with unfavorable mix, increased input costs and supply-chain hurdles led to a greater-than-anticipated contraction in gross margin. Further, the company expects gross margin to decline nearly 125 bps year over year in 2018.

Nevertheless, management remains on track to counter these challenges through increased supply-chain capacity and flexibility, and enhanced SKU rationalization. Notably, Hershey's Margin for Growth program, along with lower taxes and synergies from Amplify's buyout, is likely to bring down its SG&A costs and help it pare gross margin woes. As part of its Margin for Growth multi-year program, Hershey plans to reduce its global workforce outside the United States by 15%. This multi-year program is intended to improve overall operating margin through supply-chain optimization, a streamlined operating model and reduced administrative expenses, with savings primarily being achieved in 2018 and 2019. These moves are anticipated to boost efficiency, leverage global shared services and common processes, and increase capacity utilization. Apart from this, Hershey is progressing well with its continuous improvement and strategic revenue management plan, which is also expected to enhance margins.

Sales-Driving Efforts Bode Well

Hershey regularly brings innovation to its core brands to meet consumer demand and needs that are not addressed by its current portfolio. Innovation is expected to contribute in 2018 revenues as well, which gives out positive signals for the quarter to be reported. Moreover, the company is making solid efforts to go beyond chocolate and gain a solid footing in the fast-growing market for healthy snacks. To this end, the company acquired Amplify Snack Brands - the maker of SkinnyPop and Tyrrell's potato chips. The Amplify acquisition contributed 3.4% to first quarter sales and is expected to be accretive to earnings by 8-12 cents in 2018.

Moreover, the company is likely to gain from its solid international presence and digital endeavors. It 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. Talking of digital commerce, net sales from this channel grew 30% in the last reported quarter, on the back of Hershey's digital strategy. Management expects such trends to speed up, which remains a tailwind for Hershey's top line that grew almost 5% year over year in the first quarter.

Expectations in Numbers

Clearly, Hershey's sales-driving and cost-reduction efforts are likely to cushion the company from margin woes and lead it to top and bottom-line growth. The consensus marks for second-quarter sales from North America, and International and Other regions are pegged at $1,540 million and $198 million, reflecting upsides of nearly 4.3% and 6.5%, from their respective year-ago reported sales figures.

The Zacks Consensus Estimate for overall sales is currently pegged at nearly $1,749 million, up 5.2% from $1,663 million reported in the second quarter of 2017. The Zacks Consensus Estimate for earnings is pegged at $1.11 per share, up 1.8% from the year-ago reported figure. The estimate has remained stable in the past 30 days.

What Does the Zacks Model Unveil?

To top it, our proven model shows that Hershey is likely to beat bottom-line estimates this quarter. For this to happen, a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold). You can uncover the best stocks to buy or sell before they're reported with our Earnings ESP Filter .

Markedly, Hershey's Zacks Rank #3 and Earnings ESP of +0.26% make us reasonably confident of an earnings beat.

Other Stocks Poised to Beat Earnings Estimates

Here are some other companies you may want to consider, as our model shows that these have the right combination of elements to post earnings beat:

Michael Kors Holdings Limited KORS , a Zacks #3 Ranked stock, has an Earnings ESP of +0.87%. You can seeĀ  the complete list of today's Zacks #1 Rank stocks here .

Guess?, Inc. GES , a Zacks #2 Ranked company, has an Earnings ESP of +4.08%.

Francesca's Holdings Corporation FRAN has an Earnings ESP of +60.00% and a Zacks Rank of 3.

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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 , Earnings , Stocks
Referenced Symbols: HSY , FRAN , GES , KORS

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