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On Jun 12, we issued an updated research report on The Hershey Company (HSY - Analyst Report).

On Apr 24, Hershey announced lower-than-expected first-quarter 2014 results as sales softened and input costs increased. Hershey missed the Zacks Consensus Estimate for both earnings and revenues — possibly one of the softest results in the company’s history.

First-quarter adjusted earnings of $1.15 per share grew 5.5% from the prior-year quarter as lower brand building and advertising costs made up for a weaker top-line performance. Despite increasing 2.4% from the prior-year quarter, revenues were lower than management’s expectations. Declines in Latin America and inconsistent U.S. retail trends hurt the top line during the quarter. Tough year-ago comparisons which included strong distribution gains by Brookside, a late Easter and timing of innovation also hurt sales.

Though management maintained the top- and bottom-line guidance for 2014, it lowered gross margin expectations in anticipation of higher dairy costs.

The weak top-line performance in the first quarter raised concern among a group of analysts. This group questioned whether the soft revenues seen in the first quarter was just a one-time miss or an indication for further top-line weakness due to growing competitive pressure. However, another group of firms believe that Hershey’s sales should recover through the remaining of 2014 on the back of improving consumer trends, several product launches (in both the U.S. and international markets) and greater levels of advertising and consumer marketing.

However, the overall cost environment for food commodities is expected to be under pressure in 2014/2015 due to imbalance in domestic and worldwide agricultural supply and demand, and other macroeconomic factors. Dairy costs have started increasing significantly in the past few months. Management lacks visibility on further dairy cost rise in 2014, forcing it to lower gross margin expectations for the year. We believe rising dairy costs could prove to be a major headwind for the company in the next few months.

Other Stocks to Consider

Hershey carries a Zacks Rank #3 (Hold). Better-ranked food/beverage stocks include The WhiteWave Foods Company (WWAV - Snapshot Report), B&G Foods, Inc. (BGS - Snapshot Report) and The Hain Celestial Group, Inc. (HAIN - Analyst Report). All the three stocks carry a Zacks Rank #2 (Buy).

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