Will Hershey's (HSY) Cost-Saving Plans Drive Q1 Earnings?

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The Hershey Company HSY is slated to report first-quarter 2018 results on Apr 26, before the opening bell.

Hershey's latest cost-savings program, Margin for Growth, is expected to boost profits, which will be reflected in the to-be-reported quarter. As part of this multi-year program, the company will reduce global 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 the Margin for Growth program are estimated in the range of $55-$65 million in 2018.

Also, under its continuous improvement and productivity (CIP) program, management has optimized its North American manufacturing footprint, added manufacturing capabilities in international markets, increased supply chain productivity and improved the sales mix significantly. The productivity and cost savings from these efforts are being invested in brand building as well as to support growth and gain marketplace insights, which in turn are boosting the company's margins.

Let us delve into other factors that are likely to impact the company's first-quarter 2018 earnings.

Product Innovation to Support Top-Line Growth

The company's revenues are expected to rise 3.3% in the to-be-reported quarter, per the Zacks Consensus Estimate, as against a decline of 1.6% in the prior quarter. The consensus estimate for North America segment revenues, comprising 89% of total revenues, is pegged at $1.7 billion, reflecting an increase of 3.5% year over year. International and Other segment is likely to witness 4.4% increase in sales, per the consensus estimate.

Products like Cookie Layer Crunch, Popped Snack Mix and Chocolate Dipped Pretzels have significantly contributed to the company's growth in 2017. The trend is likely to continue in the to-be-reported quarter. The launch of Hershey's Gold in an instant consumable pack type is expected to contribute to revenue growth in the first quarter.

Meanwhile, the implementation of Margin for Growth program in China is driving majority of the improvement. However, China SKU analysis and optimization efforts have dented gross sales volume in 2017 and will persist in 2018.

Packaging, Freight & Logistics Costs to Hurt Margins

The introduction of innovative products is not enough to offset sluggish sales performance. Packaging and marketing initiatives are also required to ensure strong customer outreach. The company is transitioning from lay-down bags to stand-up pouches on core chocolate candy products. These ensure that products get on the shelf quicker with less in-store labor and improve shopping experience. These packaging initiatives along with higher freight and logistics cost hurt margins adversely and affect gross margin.

Nevertheless, Hershey's productivity and cost-saving initiatives is likely to offset higher costs. Overall, Hershey's bottom line is likely to increase 7.6% to $1.06 in the first quarter of 2018.

Here is what our quantitative model predicts:

Hershey has the right combination of the two key ingredients - a positive Earnings ESP and Zacks Rank #3 (Hold) or higher - which is required for an earnings beat.

Zacks ESP : The Earnings ESP for Hershey is +0.65%. You can uncover the best stocks to buy or sell before they're reported with our Earnings ESP Filter .

Zacks Rank : Hershey carries a Zacks Rank #3, which increases the predictive power of ESP.

Meanwhile, last quarter, the company's earnings missed the Zacks Consensus Estimate by 2.8%. Nevertheless, the company surpassed the consensus mark in three of the last four quarters, resulting in average earnings beat of 6.2%.

Hershey Company (The) Price and EPS Surprise

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

Other Stocks to Consider

Here are a few other companies in the Zacks Consumer Staples sector that can be considered, as our model shows that they have the right combination of elements to post an earnings beat in their upcoming releases.

Coca-Cola KO has an Earnings ESP of +0.24% and a Zacks Rank #2 (Buy). The company is scheduled to report quarterly results on Apr 24. You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here .

Pilgrim's Pride Corporation PPC has an Earnings ESP of +4.67% and a Zacks Rank #3. The company is slated to report quarterly results on May 5.

The Estee Lauder Companies Inc. EL has an Earnings ESP of +0.46% and a Zacks Rank #3. The company is slated to report quarterly numbers on May 2.

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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: KO , EL , HSY , PPC

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