Hershey's (HSY) Q2 Earnings Beat Estimates, Revenues Miss

The Hershey Company HSY reported second-quarter 2020 results, wherein the bottom line came ahead of the Zacks Consensus Estimate. Management remains impressed with sales growth in North America even in the face of coronavirus-related hurdles. Notably, the company’s solid brands helped it gain confectionary market share of 225 basis points. Further, the bottom line was aided by robust cost management, which helped counter COVID-19-related cost pressures.

However, overall sales declined year over year and fell short of the consensus mark due to soft volumes in the International & Other segment as well as currency headwinds. Nonetheless, Hershey remains encouraged with its business enhancements and momentum. Also, the company believes that it has a stable liquidity position to cater to its current business requirements. Also, the company reiterated its long-term financial targets as well as capital priorities.

Hershey Company The Price, Consensus and EPS Surprise

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

Earnings & Revenue Discussion

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.

Segmental Update

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%.

Financials

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.

Outlook

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.

Shares of this Zacks Rank #4 (Sell) company have lost 10.5% in the past six months compared with the industry’s decline of 10.9%.

Looking for Promising Food Stocks? Check These

Hostess Brands TWNK, with a Zacks Rank #2 (Buy), has a trailing four-quarter earnings surprise of 7.3%, on average. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Kraft Heinz KHC, also with a Zacks Rank #2, has a long-term earnings growth rate of 6%.

B&G Foods BGS has a trailing four-quarter earnings surprise of 5.4%, on average, and a Zacks Rank #2.

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