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Hershey (HSY) to Lay Off 15% of Workforce to Fuel Growth

Zacks Equity Research

The Hershey Company HSY unveiled plans to revamp North America confectionery and snacks business and also return its international businesses to profitability at the earliest.

Ahead of an investors’ conference in New York on Mar 1, Hershey announced that as part of its Margin for Growth multi-year program, it will reduce its global workforce outside the U.S. by 15%.

This multi-year program is intended to improve overall operating margin through supply chain optimization, a streamlined operating model and reduced administrative expenses, with savings primarily being achieved in 2018 and 2019. These moves are anticipated to boost efficiency, leverage global shared services and common processes and increase capacity utilization.

These initiatives will enable Hershey to achieve its adjusted operating profit margin target of about 22% to 23% by 2019. The company will incur pre-tax charges of $375 million to $425 million, and provide benefits between $80 million and $100 million from the layoffs.

This program will likely generate cash savings at an annual run-rate of $150 million to $175 million by year-end 2019.

The largest chocolate manufacturer in North America as well as a global leader in chocolate and non-chocolate confectionery, Hershey, is suffering from margin pressure. Higher supply chain costs (including Malaysian manufacturing) and trade investments are continuously outweighing the company’s productivity and cost savings benefits. Adjusted gross margin fell 50 basis points  (bps) in the fourth quarter and 40 bps in 2016.

Additionally, soft international sales due to macro headwinds, changing consumer shopping habits and intense competition from the broader snacking environment in the U.S. were responsible for the weak top-line growth.

The U.S. chocolate maker has been pinning its hopes on this multi-year program to drive growth which will primarily be driven by North America as approximately 87.8% of the company’s business was generated in the U.S in 2016.

Over the long term, Hershey expects net sales growth of 2% to 4% annually on a constant currency, driven mainly by its North America business. Moreover, the company expects to generate long-term adjusted earnings per share-diluted growth of 6% to 8%.

Meanwhile, the company cut    its earnings projection for 2017 to $3.19–$3.45 per share from the $4.54–$4.65 per share estimated earlier. However, adjusted earnings per share guidance was reaffirmed to increase 7–9% to the range of $4.72–$4.81 on full year net sales growth of 2% to 3%.

Stock Performance

Hershey’s shares have gained around 17.5% in the last one year, compared to 8.7% decline of the Zacks categorized Food-Confectionary industry. In fact, in the last six months, the company’s stock price has gained about 9% versus a 5.9% dip for the broader industry.

Again, Hershey’s Return on Equity (ROE) ratio is 110.82% compared with the industry average of 60.22%. This indicates that the company reinvests more efficiently as compared with its peer group.

Also, over the past 30 days, the Zacks Consensus Estimate for Hershey increased 3.3% to $1.27 per share for the current quarter, by 2.8% to $4.79 for 2017 and 2.6% to $5.19 per share for 2018. The positive earnings estimate revisions indicate analysts’ confidence and substantiate the Zacks Rank #2 (Buy) for the stock. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Other Stocks that are Worth a Look

Favorably placed stocks in the consumer staples sector include Unilever PLC UL, Ingredion Incorporated INGR and J&J Snack Foods Corp. JJSF, all carrying a Zacks Rank #2.

For full-year 2017, Unilever’s EPS is expected to grow 6.5%.

Ingredion also has a decent earnings surprise history, beating the Zacks Consensus Estimate in all the last four quarters, the average positive earnings surprise being 10.36%.

J&J’s current year EPS is expected to improve 8%.

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