It has been about a month since the last earnings report for Hershey (HSY). Shares have added about 6.3% in that time frame, outperforming 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 its most recent earnings report in order to get a better handle on the important drivers.
Buyouts & Lower Costs Drive Hershey's Q1 Earnings
Hershey delivered robust first-quarter 2019 results wherein 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.
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.
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.
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.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed an upward trend in fresh estimates.
Currently, Hershey has a strong Growth Score of A, though it is lagging a lot on the Momentum Score front with a D. Following the exact same course, the stock was allocated a grade of D on the value side, putting it in the bottom 40% 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 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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