It has been about a month since the last earnings report for Hershey (HSY). Shares have added about 0.8% in that time frame, underperforming the S&P 500.
Will the recent positive trend continue leading up to its next earnings release, or is Hershey due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.
Hershey's Q2 Earnings Beat Estimates, Revenues Miss
Hershey reported second-quarter 2020 results, wherein adjusted earnings per share (EPS) of $1.31 came ahead of the Zacks Consensus Estimate of $1.12, while it remained flat year over year.
Consolidated net sales of $1,707.3 million dropped 3.4% year over year, lagging the Zacks Consensus Estimate of $1,744 million. Currency translations and volumes had a negative impact of 0.7 points and 7 points, respectively, on sales. Volumes were affected by COVID-19-related hurdles in the company’s International and Other segment, as well as North America’s price elasticity. Meanwhile, price realization drove sales by 3.5 points. Buyouts and divestitures had a net favorable impact of 0.8 points on the top line, thanks to the acquisition of ONE Brands.
Margins in Detail
Adjusted gross margin contracted 10 bps to 46.4% due to high coronavirus-related manufacturing costs and adverse mix, partly compensated by price realization gains.
Selling, marketing and administrative costs dropped 9.9% during the quarter on the back of media cost efficacy and investment optimization associated with coronavirus. Advertising and related consumer marketing expenses fell 14%. Adjusted operating profit amounted to $386.1 million, up 4.4% from the prior-year quarter’s figure. Adjusted operating margin expanded 170 basis points to 22.6%, courtesy of solid operational and corporate cost management, which countered high COVID-19-related costs.
North America (the United States and Canada) net sales improved 1% year over year to $1,583.8 million. Markedly, price realization and net impact of acquisitions and divestitures boosted the unit’s sales by 4.2 points and 0.8 points, respectively. However, volumes and currency translations dented the unit by 3.8 points and 0.2 points, respectively.
Net sales in the International and Other segment slumped 38% to $123.5 million. On a constant-currency or cc basis, net sales decreased 33.4%. Volumes hit sales by 31.3 points, mainly due to the coronavirus impact on consumers’ economic security and flexibility, and on retail operations. Further, net price realization saw a negative impact of 2.1 points. Closure of Hershey’s owned retail locations in the quarter, together with major air travel declines, also marred results in this division. Combined net sales in the company’s focus markets, which include Mexico, Brazil, China and India, dropped nearly 42.9%. Excluding currency headwinds, combined organic sales from these markets decreased about 31.8%.
Hershey ended the quarter with cash and cash equivalents of $1,165.3 million, long-term debt of $4,091.2 million and total shareholders’ equity of $1,756.1 million.
In a separate press release, the company declared a roughly 4% increase in its quarterly dividend, taking it to 80.4 cents per share for its common stock and 73.1 cents for Class B common stock. These are payable on Sep 15 to shareholders of record as of Aug 21. Notably, this marks the company’s 363rd and 144th straight dividend payout on its common stock and Class B common stock, respectively. In 2020, Hershey expects to return cash worth roughly $800 million to shareholders, including dividend payouts of $650 million and share buybacks worth $150 million, which were concluded earlier this year.
Given the recent rise in coronavirus cases and its impact on consumer flexibility, government regulations and retail operations, management did not offer any fiscal 2020 guidance. Nonetheless, the company expects sales growth to accelerate in the second half of the year, based on the current momentum and the assumption that consumer trends will not face much disruption. Further, management anticipates margin expansion in the second half of the year to be backed by pricing and cost management.
Management expects stronger second-half sales in the North America unit, backed by continued higher at-home consumption, sales recovery in food service and specialty retail networks, price realization, and replenishment of retailer and distributor inventory levels. However, the impact of rising COVID-19 cases on consumer activities and retail operations remains uncertain.
For the International and Other unit, management anticipates a slower recovery based on the current travel, government, retail and macroeconomic conditions. While sales trends are likely to improve going forward, the second half sales are expected to lag the year-ago period’s figure by double digits. Overall, management expects currency headwinds to have a 70-basis-point adverse impact on the full-year top line.
How Have Estimates Been Moving Since Then?
It turns out, estimates review have trended upward during the past month.
At this time, Hershey has a great Growth Score of A, though it is lagging a bit on the Momentum Score front with a B. Charting a somewhat similar path, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.
Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.
Estimates have been broadly trending upward for the stock, and the magnitude of these revisions looks promising. Notably, Hershey has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.
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