Chocolate giant The Hershey Company HSY had a disappointing start to 2015 as it had to battle increased competition from broader snacks categories. Hershey missed the Zacks Consensus Estimate for both earnings and revenues in the first quarter of the year. Volume losses due to higher prices and greater-than-anticipated currency headwinds hurt results in the quarter.
Moreover, the company cut its 2015 revenue outlook, citing greater-than-expected currency headwinds and possibly increased competition.
Earnings Discussion
Hershey’s first quarter adjusted earnings of $1.09 per share missed the Zacks Consensus Estimate of $1.15 by almost 5.2%. Earnings also declined 5.2% year over year. The downside reflects higher costs and expenses.
Revenues Below Expectations
Net sales of $1.94 billion missed the Zacks Consensus Estimate of $1.96 billion by 1.2%. Net sales increased 3.5% year over year including the impact of currency and acquisitions. Currency hurt revenues by 1.1 percentage points (pp), higher than 0.8 pp in the last quarter. Net acquisitions and divestitures contributed 1.6 pp to the top line. Meanwhile, net sales were below management expectations owing to softness in China where many consumer packaged goods categories declined.
Net price realization benefited revenues by 3.8 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 0.8 pp due to volume elasticity related to the price increase and the slowdown in China.
So far, Hershey’s top-line performance has been below expectations in 2015 due to abnormal shopping patterns, increased competition in the confectionery category, a challenging macro environment and soft international growth.
Despite greater-than-expected unfavorable foreign currency exchange impact related to the Canadian dollar, North America net sales increased 2.9%, slightly better than expectations. First-quarter net sales of Hershey’s International and Other segment increased 8.5% to $230.8 million, driven by the Shanghai Golden Monkey acquisition.
Margins Match Expectations
Hershey’s adjusted gross margin increased 10 basis points (bps) to 46.6% and came in line with management expectations. Supply chain productivity, costs savings initiatives as well as net price realization partially offset the negative impact of higher input costs.
Excluding advertising, selling, marketing and administrative expenses (SM&A) increased 15% in the first quarter of 2015. SM&A includes investments in non-advertising brand-building and go-to-market capabilities in both the U.S. and international markets.
Operating margin fell 200 bps to 20.3% due to higher gross margins.
Net Sales Growth Guidance Cut on Currency Headwinds
The company lowered its net sales growth guidance for 2015 for the second consecutive quarter. Net sales growth for 2015 is expected in the range of 4.5% to 5.5% compared to the previous range of 5.5% to 7.5%. The guidance includes a negative impact of 1.5 pp from currency and a positive contribution from acquisitions of around 2.5 pp.
Gross Margin Guidance Raised
Gross margin is expected to increase 155 to 165 basis points (bps) in 2015 compared with the previous guidance of an increase of 135 to 145 bps provided during the Consumer Analyst Group of New York (CAGNY) conference in Feb 2015. The upside reflects input cost strategies initiated in April and pricing action.
Meanwhile, management maintained its adjusted earnings guidance in a range of $4.30–$4.38. The new guidance represents 8% to 10% growth. Acquisitions and divestitures are expected to dilute earnings by 3 cents to 5 cents per share.
Hershey carries a Zacks Rank #3 (Hold).
Other Stocks to Consider
Some better-ranked stocks worth considering in the broader consumer staples industry include Adecoagro S.A. AGRO, Amira Nature Foods Ltd. ANFI and Carriage Services Inc. CSV. All these stocks sport a Zacks Rank #1 (Strong Buy).
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