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Renowned chocolate maker, The Hershey Company (HSY - Analyst Report), announced better-than-expected fourth-quarter results helped by solid holiday season sales in North America. Hershey beat the Zacks Consensus Estimate for both earnings and revenues and raised the lower end of its earnings per share guidance for 2014.

Hershey’s fourth-quarter 2013 adjusted earnings of 86 cents per share beat the Zacks Consensus Estimate of 85 cents by a penny. Earnings also rose 16.2% from the prior-year quarter driven by solid revenue growth which made up for softer margins as well as higher taxes.

The adjusted earnings mainly exclude acquisition/integration costs and pension costs and expenses related to Hershey’s supply chain and cost savings program — Project Next Century.

Revenues and Volume Growth

Hershey’s fourth-quarter net sales of $1.96 handily beat the Zacks Consensus Estimate of $1.88 billion by 4.3% and grew 11.7% from the prior-year quarter. The strong fourth-quarter top-line performance was in line with expectations of sales picking up in the fourth quarter after a relatively softer performance in the third.

Solid volume growth and market share gains in both North America and overseas pushed up the top line. A solid holiday season led to better-than-expected sales in North America. Moreover, international sales (excluding U.S. and Canada) added 3.5% to top-line growth.

Volumes of core brands like Hershey’s, Reese’s and Kit Kat grew 9% in the quarter driven by heavy season specific advertising/promotion and merchandising. For the fourth quarter, the company conducted solid in-store merchandising and programming across all channels to capitalize on the Halloween and holiday season which pushed up volumes in the peak holiday season.

New products in both the U.S. and overseas markets boosted top-line growth by 3.2%. Currency hurt revenues by 0.5 percentage points, same as in the last quarter.

Hershey has been consistently gaining market share in all major channels of the U.S. CMG (chocolate, mint and gum) category. These channels include food, drug, mass merchandisers including Wal-Mart Stores, Inc. (WMT - Analyst Report), and convenience stores. For the 12 weeks ended Dec 28, 2013, Hershey’s CMG sales in these channels increased 5.2% while market share grew 1.1 share points year over year. The growth was driven by core brand growth due to strong marketing investments.

Margins Decline Sequentially

Hershey’s adjusted gross margin for the quarter expanded 80 basis points (bps) to 43.9%, driven by lower input costs, productivity gains and improved efficiencies from supply chain initiatives. However, gross margins declined sequentially and were lower than management’s expectations due to higher cost of purchases and increased inventory-related costs.

Excluding advertising, selling, marketing and administrative expenses (SM&A) increased 10% in the fourth quarter of 2013. SM&A includes investments in non-advertising brand-building and go-to-market capabilities in both the U.S. and international markets.

Advertising spend increased 20% over the prior-year quarter to support core brands as well as new products in both the U.S. and international markets. Operating margin improved 50 bps in the quarter to 16.3%, but declined sequentially.

Annual Results

In fiscal 2013, the company witnessed 7.6% increase in revenues to $7.14 billion, well above the Zacks Consensus Estimate of $7.09 billion. The net sales growth rate also beat the company’s expectations of about 7% growth.

Adjusted earnings were $3.72 per share, which beat both the Zacks Consensus Estimate of $3.71 as well as the company’s guidance range of $3.68–$3.71 by a penny. Earnings increased 14.8% from the prior-year figure.

Solid 2014 Outlook

The company slightly raised its full-year 2014 earnings expectations. Adjusted earnings per share are now expected in the range $4.05–$4.13, higher than $4.01–$4.12. The guidance range continues to represent 9%-11% year over year growth, in line with the long-term goals.

2014 net sales growth is still expected within the long-term target range of 5%–7% (including currency headwinds) to be driven mainly by volume growth. In 2014, the company will continue to focus on core brands, launch many new products (in both the U.S. and international markets), and leverage Hershey's scale at retail. Further, Hershey plans to accelerate investments in international markets in 2014. International sales are expected to grow in double digits in 2014, helped by acquisitions and joint ventures as well as investments to boost organic growth.

These efforts are expected to continue to drive both top- and bottom-line growth next year.

Gross margins are expected to expand 50 bps in 2014 driven by input cost deflation, higher productivity and greater fixed cost leverage.

Other Stocks to Consider

Hershey carries a Zacks Rank #2 (Buy). The company’s strong brand positioning, strategic marketing investments in core brands, disciplined innovation and consumer capabilities make it attractive.

Other favorable-ranked food stocks include Post Holdings, Inc. (POST - Snapshot Report) and Green Mountain Coffee Roasters, Inc. (GMCR - Analyst Report). Both the stocks carry a Zacks Rank #1 (Strong Buy).

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