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Buyouts & Lower Costs Drive Hershey's (HSY) Q1 Earnings

Zacks Equity Research
ConocoPhillips (COP) generates $2.9 billion of cash from operating activities in first-quarter 2019.

The Hershey Company HSY delivered robust first-quarter 2019 results wherein both the top and bottom line came ahead of the Zacks Consensus Estimate and also increased year over year. Results gained from acquisitions, improved volumes and enhanced margins.

Notably, this Zacks Rank #2 (Buy) stock has rallied 29% in a year, outpacing the industry’s growth of 27.2%.

Earnings & Revenue Discussion

Adjusted earnings per share of $1.59 surpassed the Zacks Consensus Estimate of $1.48 and also improved 12.8% year over year. This can be attributed to higher sales, lower tax rate and expanded margins. Effective tax rate (on an adjusted basis) contracted 290 basis points (bps) to 22% in the quarter.

Consolidated net sales of $2,016.5 million rose 2.3% year over year and surpassed the Zacks Consensus Estimate of $1,984 million. Net impact from buyouts and divestitures as well as volumes benefited sales growth by 0.9 points and 1.7 points, respectively. Further, net price realization had a 0.2-point positive impact while currency translations had a 0.5-point adverse impact on sales growth.

Margins in Detail

Adjusted gross margin expanded 80 basis points (bps) to 45.7% on the back of lower raw material costs, higher volumes and impacts from cost-reduction initiatives.

Total advertising and related consumer marketing expenses dipped 0.8%. Excluding this, selling, marketing and administrative costs slid 1.9%, courtesy of a decline in general administrative expenses. This, in turn, was driven by the company’s Margin for Growth Program along with lower costs related to hiring.    

Adjusted operating margin expanded 160 bps to 23.3% owing to improved volumes, gross margin and a decrease in selling, marketing and administrative costs.

Segmental Update

North America (the United States and Canada) net sales rose 3.2% to $1,807.0 million, driven by volume gains, acquisitions and an improved net price realization. On the contrary, currency movements were a spoilsport. Segment income rose 5.7% to $564.8 million on the back of higher sales, lower marketing and administrative expenses and a favorable gross margin.

Net sales in the International and Other segment fell 4.9% to $209.5 million due to divestitures and currency headwinds. This was somewhat compensated by an improved net price realization and solid volumes. On a currency-neutral basis, net sales inched up nearly 3% in Mexico, Brazil, China and India on a combined basis. Segment income came in at $20.2 million in the quarter, up 14.5% year over year. This was fueled by an improved gross margin, stronger volumes and improved selling, marketing and administrative costs, stemming from Hershey’s Margin for Growth Program.

Financials

Hershey ended the quarter with cash and cash equivalents of roughly $466 million, long-term debt of $3,236.3 million and total shareholders’ equity of $1,423.4 million.

In a separate press release, Hershey declared quarterly dividends of 72.2 cents per share for its common stock and 65.6 cents per share for Class B shares. This is payable Jun 14, 2019 to shareholders of record as on May 24.

2019 Guidance

Clearly, Hershey began 2019 on a strong note and is on track to achieve its financial goals. The company is firmly focused on making core brand investments and generating balanced growth. That said, Hershey reiterated its outlook for 2019.

For 2019, Hershey expects net sales to rise 1-3%. Net impact from the buyouts and divestitures is expected to leave a roughly 0.5-point positive impact. Currency headwinds are anticipated to affect negligibly on net sales growth.

Finally, Hershey envisions adjusted EPS for 2019 to be $5.63-$5.74, indicating a 5-7% increase from the reported figure of 2018.

Check Out These Other Solid Food Stocks

MEDIFAST MED has a long-term EPS growth rate of 20% and a Zacks Rank #1 (Strong Buy).You can see the complete list of today’s Zacks #1 Rank stocks here.

General Mills GIS has a Zacks Rank #2 and a long-term earnings per share growth rate of 7.5%.

Lamb Weston LW has a long-term earnings per share growth rate of 12.4% and a Zacks Rank of 2.

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