The Hershey Company HSY is slated to report fourth-quarter 2017 results on Feb 1, before the opening bell.
We expect the top line to remain subdued in the to-be-reported quarter, as has been the case for quite some time now owing to changes in consumer preference in North America and soft international sales.
Food companies are suffering as the North American food industry is experiencing changes in consumer preference (shift toward products with less artificial sweeteners, sodium and saturated fat), consumer dynamics (such as increased demand for portable and on-the-go products) and increased demand for lower-priced products. The Zacks Consensus Estimate for North America segment revenues, comprising 89% of total revenues, is pegged at $1.67 billion, reflecting a decline of 1% year over year in the fourth quarter.
To add to the woes, Hershey has been witnessing weakness in international markets since 2015. International sales declined 14% (including acquisitions/divestures and currency headwinds) in 2015 and 0.5% in 2016, primarily due to weakness in China. Again, in the first nine months of 2017, sales increased a meager 0.3% year over year. The trend is expected to continue in the fourth quarter as well. International and Other segment is likely to witness 1.4% increase in sales, per the consensus estimate.
Overall, the Zacks Consensus Estimate for fourth-quarter revenues stands at $1.98 billion, implying 0.3% year-over-year growth.
Let as delve deeper into other factors that are likely to impact Hershey’s Q4 performance:
To combat weak sales, Hershey regularly innovates core brands to meet consumer demand and needs that are not addressed by its current portfolio. In the fourth quarter, the company launched Hershey's Gold and Cookie Layer Crunch Triple Chocolate. However, sales of these products are not expected to be as great as the Cookie Layer Crunch sale in the prior-year quarter.
In the fourth quarter, the company had plans of introducing retail-ready packaging at select outlets. This initiative enables products to get on the shelf quicker, with less in-store labor and also improves the shopping experience in the aisle. Also, Hershey is transitioning the packaging of its core chocolate products. Though these initiatives will improve shelf presence and visibility over the long haul, it is expected to affect fourth-quarter gross margin.
Moreover, higher advertising expenses in China and the United States related to product innovation are expected to impact results in the to-be-reported quarter. Again, supply chain costs that dented third-quarter operating profits are expected to remain an overhang in the fourth quarter as well.
Overall, Hershey’s bottom line is likely to decline 9.4% to $1.06 per share in the fourth quarter of 2017. Last quarter, the company’s earnings surpassed the Zacks Consensus Estimate by 3.9%. The company surpassed the consensus mark in all of the last four quarters, resulting in an average earnings beat of 9%.
On the bright side, we are encouraged by Hershey’s productivity improvement and cost-saving initiatives. The company expects $25 million in savings from the Margin for Growth program. As part of this multi-year program, it will reduce its global workforce outside the United States by 15%. This program is intended to improve overall operating margin through supply chain optimization, a streamlined operating model and reduced administrative expenses.
International and Other segment’s operating income increased substantially in the third quarter on the implementation of the Margin for Growth program and the favorable timing of select investments and expenses. The trend is expected to reflect in the fourth-quarter results as well.
Quantitative Model Prediction
Here is what our quantitative model predicts:
Hershey has the right combination of the two key ingredients — a positive Earnings ESP and Zacks Rank #3 (Hold) or higher — which is required for an earnings beat.
Zacks ESP: The Earnings ESP for Hershey is +0.87%. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.
Zacks Rank: Hershey carries a Zacks Rank #3, which increases the predictive power of ESP.
Hershey Company (The) Price and EPS Surprise
Other Stocks to Consider
Here are a few other consumer staples stocks that you may consider, as they have the right combination of elements to post an earnings beat this quarter.
United Natural Foods UNFI has an Earnings ESP of +5.67% and a Zacks Rank #2 (Buy).
Coca-Cola European Partners CCE has an Earnings ESP of +0.82% and a Zacks Rank #3. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Post Holdings POST has an Earnings ESP of +2.44% and a Zacks Rank #3.
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