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Hershey (HSY) Down 4.9% Since Last Earnings Report: Can It Rebound?

Zacks Equity Research

A month has gone by since the last earnings report for Hershey (HSY). Shares have lost about 4.9% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Hershey due for a breakout? 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 catalysts.

Hershey's Q1 Earnings Lag Estimates, Guidance Withdrawn

Hershey reported first-quarter 2020 results. Adjusted earnings per share (EPS) of $1.63 fell short of the Zacks Consensus Estimate of $1.70, while it rose 2.5% year over year. The year-over-year upside can be attributed to higher sales and a lower tax rate.

Consolidated net sales of $2,037.3 million rose 1% year over year, lagging the Zacks Consensus Estimate of $2,080 million. Price realization drove sales by a 2.8 point. Buyouts and divestitures had a net favorable impact of 0.8 point on the top line, thanks to the acquisition of ONE Brands. However, currency translations and volumes had a negative impact of 0.3 and 2.3 points, respectively, on sales. Further, COVID-19 had a modest impact on net sales.

Margins in Detail

Adjusted gross margin expanded 90 bps to 46.6%, backed by net price realization as well as plant efficiencies stemming from actively building inventory to lower coronavirus-related risks.

Selling, marketing and administrative costs escalated 4.8% during the quarter. Advertising and related consumer marketing expenses rose 4.5% due to increased advertising spending in North America.

Adjusted operating profit amounted to $471.5 million, up 0.2% from the prior-year quarter’s figure. However, adjusted operating margin declined 20 basis points to 23.1% as gains from improved gross margin were offset by increased advertising costs and elevated business investments.

Segmental Update

North America (the United States and Canada) net sales improved 2.1% year over year to $1,844.8 million. Markedly, price realization and net impact of acquisitions and divestitures boosted the unit’s sales by 2.9 points and 0.9 point, respectively. However, volumes dented the unit by 1.7 points.

Net sales in the International and Other segment declined 8.1% to $192.5 million. On a constant-currency or cc basis, net sales dropped 5.8%. Volumes hit sales by 7.2 points mainly owing to the coronavirus impact in China. This was somewhat compensated by a favorable net price realization of 1.4 points. Combined net sales in the company’s focus markets, which include Mexico, Brazil, China and India, dropped nearly 13.1%. Excluding currency headwinds, combined organic sales from these markets decreased about 8.4%.

Financials

Hershey ended the quarter with cash and cash equivalents of nearly $1,094.8 million, long-term debt of $3,453.5 million and total shareholders’ equity of $1,674.5 million.

In a separate press release, Hershey declared quarterly a dividend payout of 77.3 cents per share for its common stock and 70.2 cents for Class B shares. These are payable on Jun 15 to shareholders of record as of May 22.

How Have Estimates Been Moving Since Then?

It turns out, estimates review have trended downward during the past month. The consensus estimate has shifted -9.87% due to these changes.

VGM Scores

At this time, Hershey has an average Growth Score of C, however its Momentum Score is doing a bit better with a B. However, 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 D. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. 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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