Hershey Beats 2Q Earnings; Ups View

Zacks

Renowned chocolate maker, The Hershey Company’s (HSY) second-quarter 2013 adjusted earnings of 72 cents per share beat the Zacks Consensus Estimate of 71 cents by a penny. Earnings also rose 9.1% from the prior-year quarter driven by better-than-expected top-line growth and solid margins in the quarter.

The adjusted earnings mainly exclude acquisition/integration costs, pension costs and expenses related to Hershey’s supply chain and cost savings program – Project Next Century.

Hershey raised its 2013 earnings guidance for the second time this year as it expects to gain from core brand volume growth, innovation, international expansion, lower input costs and better fixed cost leverage. The revenue and gross margin expectations were also upped and the company increased its dividend.

Revenues and Volume Growth

Hershey’s second-quarter net sales of $1.51 billion rose 6.7% from the prior-year quarter, higher than management’s expectations, due to sales volume gains. The company’s quarterly sales were in line with the Zacks Consensus Estimate.

Volume added 6.6 percentage points (pp)to revenue growth (better than the 5.3 pp in the first quarter) driven by strong volume trends and market share gains of core brands like Hershey’s, Reese’s, Kit Kat and Ice Breakers. The improving volume trends of core brands in the U.S. were driven by increased advertising investments, consumer promotions and innovation.

New products in both U.S. and overseas markets boosted top-line growth. Brookside brand products, launched last quarter, added 1.0 pp to the volume growth. Hershey acquired Brookside Foods, a Canadian confectionary company, in January last year. Currency benefited revenues by 0.1 pp, better than a negative impact last quarter.

Hershey’s has been consistently gaining market share in all major channels of the U.S. CMG (chocolate, mint and gum) category. For the 24 weeks ended Jun, 2013, Hershey’s market share in these channels grew 1.4 share points year over year driven by core brand growth. These channels include food, drug, mass merchandisers including Wal-Mart Stores, Inc. (WMT), and convenience stores.

Margins Go Up

Hershey’s adjusted gross margin for the quarter expanded 290 basis points (bps) to 47.7%, driven by lower input costs, productivity gains, improved efficiencies from supply chain initiatives, favorable mix and better fixed cost leverage.

Excluding advertising, selling, marketing and administrative, expenses (SM&A) increased 12% in the second quarter of 2013. The SM&A increase was in line with management’s expectations of being higher than the first quarter’s growth rate of 9%.

Advertising spend increased 22% over the prior-year quarter to support core brands as well as new products in both the U.S. and internationally. Despite higher S&M and advertising costs; operating margin improved 80 bps in the quarter to 18.3% mainly due to solid gross margin expansion.

The company continuously invests in advertising and marketing capabilities to build its brands globally. The company’s brand investments give it a competitive advantage and are one of the principal reasons behind the company witnessing better volume elasticity versus its peers.

2013 Outlook Upped

Hershey now expects 2013 net sales to increase about 7% (including foreign exchange impact) better than prior expectation of it being within the long-term target range of 5% – 7%.

Hershey expects to achieve its sales targets on the back of volume growth of core brands in the U.S. and the expansion of five core brands in international markets driven by increased investments in advertising and go-to-market capabilities. Increased innovation such as Kit Kat Minis, Twizzlers Bites and Jolly Ranchers Bites in the U.S. and Hershey's solid chocolate products in China and the Hershey's Mais wafer product in Brazil; and Brookside distribution gains and repeat purchases are also expected to lend a hand.

Gross margins are expected to expand in 2013 by 220 bps to 230 bps up from prior expectations of 190 bps to 210 bps, driven by input cost deflation and greater fixed cost leverage.

Hershey expects SM&A (excluding advertising) to increase at a rate greater than net sales in 2013. Advertising expenses (as a percentage of revenue) are expected to increase 20% in 2013.

The company upped its adjusted earnings guidance to a range of $3.68 – $3.71 per share from the prior expectation of $3.61 – $3.65 following encouraging performance in the first half of the year. The adjusted earnings guidance represents growth of about 14% year over year, higher than the prior expectation of a 12% increase.

Dividend Increases

Hershey’s board of directors announced quarterly dividend increases of 15.5% and 14.5% on its Common Stock and Class B Common Stock, respectively. The new quarterly dividends of 48.5 cents and 43.5 cents will be payable in September.

Other Stocks to Consider

Hershey carries a Zacks Rank #3 (Hold).Hershey’s strong brand positioning, strategic marketing investments in core brands, disciplined innovation and consumer capabilities make it attractive.

Other stocks in the food industry that are currently performing well include The J. M. Smucker Company (SJM) and B&G Foods Inc. (BGS). While BGS carries a Zacks Rank #1 (Strong Buy), SJM carries a Zacks Rank #2 (Buy).

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Read the Full Research Report on HSY

Read the Full Research Report on SJM

Read the Full Research Report on BGS

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