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Hershey's (HSY) Q1 Earnings Lag Estimates, Guidance Withdrawn

Zacks Equity Research

The Hershey Company HSY reported first-quarter 2020 results, wherein both top and bottom lines improved year over year but missed the Zacks Consensus Estimate. Management said that Hershey’s first-quarter show was modestly impacted by coronavirus. However, retail traffic and takeaways have been uncertain due to increased social distancing, which is the only way to contain the deadly virus spread. Owing to the uncertainty surrounding the duration and harshness of the pandemic and the resultant consumer behavior, management withdrew its previously-issued guidance for 2020.

Nonetheless, the company believes that it has a stable liquidity position. Also, it reiterated its long-term net targets, which include net sales growth of 2-4% and bottom-line increase of 6-8%.

Earnings & Revenue Discussion

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.

Hershey Company (The) Price, Consensus and EPS Surprise

Hershey Company (The) Price, Consensus and EPS Surprise

Hershey Company (The) price-consensus-eps-surprise-chart | Hershey Company (The) Quote

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.

Price Performance & Zacks Rank

Shares of this Zacks Rank #3 (Hold) company have rallied 22.6% in the past year compared with the industry’s growth of 12.3%.

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