Hershey (HSY) Tops Q3 Earnings, Lifts '16 Earnings View
The Hershey CompanyHSY beat the Zacks Consensus Estimate for earnings, while missing the same for sales in third-quarter 2016. Earnings benefited from lower advertising costs and higher sales in North America.
The leading chocolate manufacturer also raised its earnings expectations for 2016.
Hershey's third-quarter adjusted earnings per share of $1.29 beat the Zacks Consensus Estimate of $1.18 by 9.3%. Earnings rose 10.3% year over year as higher volumes, lower tax rate and lower share count, which resulted from share buybacks, offset relatively weaker margins.
Adjusted earnings exclude derivative mark-to-market gains, charges related to the productivity initiative and non-service-related pension expense. Including these, reported earnings were $1.06, up 51.4% year over year.
Revenues Missed Expectation but Improved
Net sales of $2.0 billion missed the Zacks Consensus Estimate of $2.02 billion. Net sales, including the impact of currency and acquisitions, improved 2.2% year over year. This marks the second straight rise in quarterly sales after four quarters of no growth.
Currency hurt revenues by 0.2 percentage points (pp).
Excluding the currency impact, sales were up 2.4%. Acquisition benefitted sales by 0.7 pp. Organically, excluding the impact of currency and acquisitions, sales were up 2.4% as demand strengthened in the U.S.
Volumes of 1 pp were in line with the expectation, backed by higher shipments in North America. Net price realization benefitted sales by 0.7 pp, softer than the benefit of 0.9 pp in the previous quarter.
North America net sales rose 1.8% to $1.76 billion. While pricing deteriorated 0.1 pp, volumes rose 1.1 pp. The acquisition of the barkTHINS brand (acquired in April) resulted in a net benefit of 0.8 pp.
Third-quarter net sales of Hershey's International and Other segment rose 5.3% to $238.9 million. Currency impact hurt sales by 2.2 pp. Excluding currency headwinds, sales were up 7.5% due to pricing gains. While pricing rose 7.4 pp, volumes inched up 0.1 pp.
Constant currency sales grew 13.3% in Mexico, 27% in Brazil as well as 14.6% in China. However, sales plunged 20.6% in India.
Hershey's adjusted gross margin contracted 40 basis points (bps) to 45.6% due to an unfavorable sales mix, and higher commodity and other supply chain costs, which offset gains from supply chain productivity and cost savings.
Excluding advertising, selling, marketing and administrative expenses (SM&A) decreased 2% as higher employee-related costs were more than offset by productivity and cost savings programs. SM&A includes investments in non-advertising brand-building and go-to-market capabilities in both the U.S. and international markets.
Again, total advertising and related consumer marketing expense was lower in third-quarter 2016.
Operating margin expanded 110 bps to 22.3% due to lower advertising costs.
The adjusted effective tax rate was 30.7%, less than 33.5% last year.
2016 Earnings Guidance Raised
Though the company maintained its full-year sales and margin guidance, it raised the previously issued earnings expectations for 2016.
Net sales are expected to inch up 1% in 2016 (including acquisition benefit of 0.5 pp).
The guidance, however, includes a negative impact of 0.75 pp from currency, lesser than previously expected.
Gross margins are still expected to be slightly below the 2015 levels. An unfavorable sales mix (related to lower non-seasonal sales) and higher commodity costs will offset greater productivity and cost savings.
Adjusted earnings per share guidance was raised to the $4.28-$4.32 range from the earlier projected range of $4.24-$4.28 (including barkTHINS dilution of 5-6 cents per share), which represents around 4-5% growth (3-4% expected earlier).
Hershey currently holds a Zacks Rank #4 (Sell).
Upcoming Peer Releases
Avon Products Inc. AVP is scheduled to report third-quarter 2016 results on Nov 3.
Cott Corporation COT is slated to report its quarterly numbers on Nov 10.
J&J Snack Foods Corp. JJSF is scheduled to report its quarterly numbers on Nov 3.
HERSHEY CO/THE Price, Consensus and EPS Surprise
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