The Hershey Company HSY beat the Zacks Consensus Estimate for earnings but missed the same for revenues. Moreover, the chocolate maker cut 2015 revenue outlook – for the third time this year – once again due to weak sales performance in China.
Hershey’s board declared a 9% increase in quarterly dividend to 58.3 cents per share from 53.5 cents.
Earnings Discussion
Hershey’s second-quarter adjusted earnings of 78 cents beat the Zacks Consensus Estimate of 74 cents by 5.4%. Earnings increased 2.6% year over year as slightly better margins offset the expected weak top-line performance.
Revenues Soft
Net sales of $1.58 billion missed the Zacks Consensus Estimate of $1.623 billion by 2.8%. Net sales were flat year over year including the impact of currency and acquisitions. Currency hurt revenues by 1.3 percentage points (pp), higher than 1.1 pp in the last quarter. Net acquisitions and divestitures contributed 1.4 pp to the top line.
Excluding the impact of currency, revenues increased 1.3% as pricing gains offset a weaker volume performance. Better-than-expected performance in the U.S. was offset by a weak sales performance in international markets, mainly China, due to economic slowdown and changing consumption trends.
Net price realization benefited revenues by 5.8 pp gaining from the price increases that the chocolate maker announced in July last year. However, volumes declined 3.6 pp due to volume elasticity related to the price increase and lower China sales.
Segment Discussion
Despite greater-than-expected currency headwinds related to the Canadian dollar, North America net sales increased 1.8% to $1.40 billion, slightly better than expectations. Excluding currency headwinds, sales increased 2.4% as pricing and market share gains offset lower volumes. While pricing increased 5.5 pp, volumes declined 3.6 pp due to lower-than-expected snacks and grocery sales and volume losses due to higher prices.
Second-quarter net sales of Hershey’s International and Other segment declined 12.1% to $179.3 million. Currency impact hurt sales by 6 pp, while SGM added 8 pp to sales. Excluding gains from SGM and currency headwinds, international sales declined due to weak chocolate sales in China.
Lower-than-expected confectionery category growth within the China modern and traditional trades and slower-than-expected consumption trends due to deteriorating economic growth are hurting sales in the country.
We believe that shift in consumer preference toward healthier snacks, like nuts, and increased competition from the broader snacking category are lowering the demand for chocolate. Weak consumer shopping trends due to economic slowdown, increased competitive activity in the chocolate category and stiff competition from e-Commerce/online sales are the other factors hurting sales trends.
Lesser-than-expected contribution from Shanghai Golden Monkey (SGM) due to confectionary category weakness also contributed to weak performance in China. Hershey acquired 80% stake in the Chinese chocolate maker in September last year. The company is re-assessing the value of Golden Monkey and expects to complete the process in the third quarter. Hershey is slated to acquire the remaining 20% stake in the fourth quarter.
Margins Relatively Better
Hershey’s adjusted gross margin increased 130 basis points (bps) to 46.7% as supply chain productivity and costs savings as well as higher pricing partially offset the negative impact of trade allowances and inventory obsolescence in China.
Excluding advertising, selling, marketing and administrative expenses (SM&A) increased 7% due to acquisitions made in the quarter. SM&A includes investments in non-advertising brand-building and go-to-market capabilities in both the U.S. and international markets. Advertising costs declined 3% in the quarter as the company lowered promotional spending in international markets.
Operating margin expanded 50 bps to 18.3% helped by higher gross margins and lower advertising costs.
Outlook Slashed
Hershey lowered the net sales growth guidance for 2015 to a range of 1.5–2.5% from 2.5–3.5%. The guidance includes a negative impact of 1.5 pp from currency and around 1.0 pp (previously 1.5 pp) positive contribution from acquisitions/divestures.
Excluding Fx headwinds, net sales are expected to increase about 3% to 4%, less than the previous estimate of 4% to 5%, due to lower-than-expected growth in China.
Gross margins are still expected to increase 135 bps to 145 bps as pricing gains and a relatively better performance in North America are expected to partially offset weak sales trends in China.
Adjusted earnings guidance was maintained in the range of $4.10 to $4.18, representing a growth rate of 3% to 5%, including dilution from mergers/acquisitions of around 20 cents.
Management is expecting sales trends to improve in the second half on the back of new products like Kit Kat White Minis, Hershey’s Caramels and Ice Breakers Cool Blasts Chews as well as solid Halloween and Holiday sales.
Stocks to Consider
Hershey carries a Zacks Rank #4 (Sell). Some better-ranked food stocks are Mondelez International, Inc. MDLZ, Cal-Maine Foods, Inc. CALM and Post Holdings, Inc. POST. All the three stocks sport a Zacks Rank #1 (Strong Buy).
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(We are reissuing this article to correct a mistake. The original article issued earlier should no longer be relied upon.)
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