The Hershey Company (HSY) is set to report fourth-quarter and full-year 2014 results on Jan 29, before the market opens. Last quarter, the company delivered a negative earnings surprise of 2.78%. Let’s see how things are shaping up for this announcement.
Factors at Play
Hershey’s first-half performance was below expectations due to abnormal shopping patterns, increased competition in the confectionery category, challenging macro environment and soft international growth.
Meanwhile, the dramatic increase in dairy costs in 2014 severely hurt Hershey’s gross margins. Greater-than-anticipated commodity cost headwinds and an unfavorable mix compelled the company to cut gross margin expectations thrice last year.
Moreover, the company cut 2014 earnings and revenue outlook during the third-quarter conference call due to weak year-to-date results, softer-than-expected international sales growth and commodity cost 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 last year.
Management expects gross margins to improve 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.
Earnings Whispers
Our proven model does not conclusively show that Hershey is likely to beat earnings this quarter. That is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1, 2 or 3 for this to happen. That is not the case here, as you will see below.
Zacks ESP: The Earnings ESP is 0.00% as both the Most Accurate estimate and the Zacks Consensus Estimate stand at $1.06.
Zacks Rank: Hershey’s Zacks Rank #3 (Hold) when combined with a 0.00% ESP, makes surprise prediction difficult.
We caution against stocks with Zacks Rank #4 and 5 (Sell-rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions momentum.
Stocks to Consider
Investors may consider the following stocks in the consumer staples/retail sector that have a positive Earnings ESP and a favorable Zacks Rank:
SUPERVALU, Inc. (SVU), with an Earnings ESP of +4.76% and a Zacks Rank #1 (Strong Buy).
Sysco Corp. (SYY), with an Earnings ESP of +2.44% and a Zacks Rank #2 (Buy).
Dr Pepper Snapple Group, Inc. (DPS), with an Earnings ESP of +5.75% and a Zacks Rank #3.
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