2014 proved to be a dismal year for The Hershey Company (HSY) as the chocolate giant battles with increased competition from broader snacks categories.
The chocolate giant missed the Zacks Consensus Estimate for both earnings and revenues in the fourth quarter as well as full-year 2014. Volume losses due to higher prices and greater-than-anticipated currency headwinds hurt results in the quarter.
Moreover, the company cut its 2015 earnings and revenue outlook citing greater-than-expected currency headwinds and possibly increased competition.
Hershey also announced a definitive agreement to acquire the Californian producer of artisanal jerky, KRAVE Pure Foods, Inc. to enter the fast growing meat snacks market.
Earnings Discussion
Hershey’s fourth-quarter adjusted earnings of $1.04 per share missed the Zacks Consensus Estimate of $1.06 by almost 2%.
Earnings grew 20.9% from the prior-year quarter as higher pricing and lower costs made up for the soft volumes and currency headwinds.
Revenues Soft
Net sales of $2.01 million missed the Zacks Consensus Estimate of $2.08 by 3.4%. Net sales increased 2.7% year over year including the impact of currency and acquisitions.
Currency hurt revenues by 0.8 percentage points (pp), higher than the last quarter’s 0.2 pp. The Shanghai Golden Monkey acquisition contributed 2.7 pp to the top line. Hershey acquired 80% interest in the Shanghai-based chocolate maker in September last year.
Net price realization benefited revenues by 3.1 pp gaining from the price increases that Hershey announced in July last year to counter higher cocoa and dairy costs. However, volumes, excluding the Golden Monkey acquisition, declined 2.3 pp due to volume elasticity related to the price increase.
Hershey’s 2014 top-line performance was below expectations due to abnormal shopping patterns, increased competition in the confectionery category, and challenging macro environment and soft international growth.
Management continued to witness irregular trends in store traffic and consumer trips in the food channels in the U.S. In addition, increased levels of distribution and in-store activity of salty, bakery and meat items are lowering the demand for chocolates. All these factors hurt sales of non-seasonal candy products unfavorably impacting the company’s sales and profits in 2014.
In North America, while seasonal sales were in line with expectations, non-seasonal net sales underperformed.
International sales increased 8%, lower than management’s expectations as strong performance in China was offset by slower sales growth in Mexico and Brazil, and greater-than-anticipated currency headwinds.
Margins Below Expectations
Hershey’s adjusted gross margin increased 30 basis points (bps) to 44.2% but missed management expectations. Higher pricing, slightly favorable input costs and productivity savings partially offset unfavorable sales mix and other supply chain costs to boost gross margins.
Excluding advertising, selling, marketing and administrative expenses (SM&A) declined 5% in the fourth quarter of 2014 due to lower employee related costs. SM&A includes investments in non-advertising brand-building and go-to-market capabilities in both the U.S. and international markets.
Operating margin increased 240 bps to 18.7% due to higher gross margins and lower costs.
Weak 2014 Results
In fiscal 2014, the company witnessed 3.9% increase in revenues to $7.42 billion, missing the Zacks Consensus Estimate of $7.49 billion by almost 1%. The net sales growth rate of 3.9% was also below the company’s expectations of about 4.75% growth.
Adjusted earnings were $3.98 per share which missed both the Zacks Consensus Estimate of $4.01 as well as the company’s guidance range of $4.01 to $4.03. Earnings increased around 7% from the prior-year figure but missed expectations of around 8%.
2015 Outlook Lowered
2015 net sales growth guidance was reduced to a range of 5.5% to 7.5% from 7% to 9% previously due to greater-than-expected currency headwinds. The guidance includes a negative impact of 1 pp from currency and a positive contribution from acquisitions of around 2.5 pp.
Gross margins are expected to increase in 2015 gaining from price increase, recent decline in input costs and productivity gains.
Management lowered adjusted earnings guidance to a range of $4.30–$4.38 from $4.37–$4.47 expected previously. The new guidance represents 8% to 10% growth, lower than prior expectation of its being within the company's long-term target of 9% to 11%. Acquisitions and divestitures are expected to dilute earnings by 3 to 5 cents per share.
Acquisition of KRAVE
KRAVE Pure Foods manufactures a leading all-natural gourmet snacks brand, KRAVE jerky, which is expected to expand Hershey’s presence in the U.S. meat snacks category which is growing at a double-digit pace. Financial terms of the transaction were not disclosed.
A shift in consumer preference toward healthier snacks like nuts lowered the demand for chocolate in 2014, compelling Hershey to look for healthier snack brands.
Other Stocks to Consider
Hershey carries a Zacks Rank #2 (Buy). Other food stocks worth considering include SUPERVALU, Inc. (SVU), Sysco Corp. (SYY) and United Natural Foods, Inc. (UNFI). While SUPERVALU sports a Zacks Rank #1 (Strong Buy), United Natural Foods and Sysco have a Zacks Rank #2.
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