On Dec 17, we issued an updated research report on The Hershey Company (HSY).
Hershey reported dismal third-quarter 2014 results following a weak first-half performance. Third-quarter adjusted earnings of $1.05 per share missed the Zacks Consensus Estimate by almost 3%. Earnings grew 1% year over year as lower-than-expected brand building and advertising costs made up for softer-than-expected international sales and weak gross margins.
Organically, sales increased 6%. Positive volume growth, improved retail takeaway and market share gains pulled up the top line.
Hershey’s first-half performance was below expectations due to abnormal shopping patterns, increased competition in the confectionery category, and challenging macro environment and soft international growth.
Though sales improved sequentially in the third quarter from a weaker first half gaining from better-than-expected Halloween seasonal orders in North America, international sales fell short of management’s expectations. Moreover, management continued to witness irregular trends in store traffic and consumer trips in food channels in the U.S. which hurt sales of everyday non-seasonal candy products unfavorably impacting the company’s product sales mix.
Meanwhile, the dramatic increase in dairy costs this year has severely hurt Hershey’s gross margins. Moreover, the company cut its 2014 earnings and revenue outlook due to weak year-to-date results, softer-than-expected international sales growth and commodity costs volatility.
In response to the rising commodity costs, management raised wholesale prices by approximately 8% across its instant consumable, multi-pack, packaged candy and grocery lines, effective Jul 15. Management expects better gross margins in 2015 backed by the price increase. We believe that the price hike, better gross margins and increased advertising support should boost sales and profits in 2015.
Advertising and related consumer marketing costs are expected to increase at a higher rate than sales growth in 2015 to support product launches as well as reduce the impact of volume elasticity resulting from higher prices. In fiscal 2015, Hershey expects to launch several products like Ice Breakers Cool Blasts Chews, Kit Kat White Minis, Hershey’s Caramels, Ice and Reese’s Spreads instant consumables.
Overall, Hershey’s strong brand positioning, strategic marketing investments in core brands, disciplined innovation and consumer capabilities make it attractive.
Stocks to Consider
Hershey carries a Zacks Rank #3 (Hold). Better-ranked stocks in the consumer staples sector include The Hain Celestial Group, Inc. (HAIN), Aramark (ARMK) and Keurig Green Mountain, Inc. (GMCR). While Aramark sports a Zacks Rank #1 (Strong Buy), Hain Celestial and Keurig Green carry a Zacks Rank #2 (Buy).
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