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Hershey Exceeds by a Penny

Zacks Equity Research

The Hershey Company (NYSE:HSY - News) has posted adjusted quarterly earnings of 56 cents a share in the second-quarter 2011 financial results, which slightly exceeded the Zacks Consensus Estimate of 55 cents. It also surpassed the prior-year adjusted earnings of 51 cents per share.

On a reported basis, earnings for the quarter came in at 56 cents, up from 20 cents per share delivered in the year-ago quarter.

The adjusted earnings in the second quarter of 2011 exclude credits related to the Project Next Century program announced in June 2010. The results also exclude pre-tax charges of $9.4 million, or 2 cents per share, more than offset by an adjustment of $11.2 million, or 2 cents a share, resulting in a net credit of $1.8 million due to a reduction of previous estimates.

The prior-year quarter excludes net pre-tax charges of $86.2 million, or 31 cents per share, comprised of Project Next Century costs of $41.5 million, or 11 cents, and a non-cash goodwill impairment charge of $44.7 million, or 20 cents related to the Godrej Hershey Ltd. joint venture in India.

Management expects its total pre-tax GAAP charges and non-recurring project implementation costs related to the Project Next Century program to be $140 million to $160 million for 2011.

In 2011, Hershey’s expects to record total GAAP charges of about $38 million to $43 million, or 11 to 12 cents per share, attributable to charges associated with Project Next Century.

The company thus expects its reported earnings per share, including business realignment and impairment charges of 11-12 cents per share, to be in the $2.67 to $2.71 range in 2011.

Further, Hershey’s expects its 2011 earnings per share to be greater than the company’s long-term 6% - 8% objective and increase around 10% in 2011 owing to strong first-half performance, solid in-store merchandising and seasonal programming.

Quarter in Detail

Exceeding the initial expectations, Hershey’s net sales of $1.33 billion rose 7.5% from the prior-year quarter, buoyed by volume in new products both domestically and internationally, along with early shipments to customers. Net price realization, primarily in the U.S., added 3 point to the sales, while foreign currency exchange rates contributed about a half point.

Quarterly sales were well ahead of the Zacks Consensus Revenue Estimate of $1.28 billion.

Management ramped up its advertising spending by 8% in the second quarter of 2011. This is in-line with the mid-single digit percentage increase forecasted for 2011.

Hershey’s adjusted gross margin for the quarter contracted 130 basis points (bps) to 43.1% as net price realization and supply chain efficiencies and productivity were more than offset by higher input costs. Adjusted operating margin was same at the level of 17.1% in the second quarter of 2011.

Management expects to continue to increase U.S. market share in the third quarter of 2011. Thus the company expects U.S. CMG category growth to be within the 3%-4% growth rate.

Hershey’s also expects its advertising expense to increase mid-single digits on a percentage basis in 2011 versus last year, supporting new product launches and core brands in both the U.S. and international markets.

Consequently, the company expects 2011 net sales, including the impact of foreign currency exchange rates, to be greater than the long-term 3% - 5% objective and increase around 6%.

Other Financial Details

Hershey ended the quarter with cash and cash equivalents of $790.3 million, long-term debt of $1.54 billion, and shareholders’ equity of $1.05 billion.

Based in Pennsylvania, Hershey engages in manufacturing, marketing, selling, and distributing various chocolate and confectionery products, pantry items, and gum and mint refreshment products worldwide. It competes with Kraft Foods Inc. (NYSE:KFT - News) which will report its second quarter 2011 earnings on August 4.

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