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The Hershey Company (HSY - Analyst Report) announced price increases for its chocolates and candies in response to rising input costs of its key ingredients. The chocolate giant now expects its fiscal 2014 results to be at the lower end of its previous targets.

Moreover, the Zacks Rank #4 (Sell) company announced in-line preliminary numbers for the second quarter of 2014.

Effective Tuesday, the maker of Reese's, Kit Kat and Ice Breakers raised wholesale prices by approximately 8% across its instant consumable, multi-pack, packaged candy and grocery lines. Direct buying customers will be exempted from the raised prices until Aug 12.

According to Hershey, most of the benefit from price increases will not materialize until the Halloween buying season in 2015.

Input Costs Rising Sharply

In 2014/2015, the overall cost environment for food commodities is expected to be under pressure due to domestic and worldwide agricultural supply and demand imbalance and other macroeconomic factors. The costs of Hershey’s key ingredients like dairy, nuts, cocoa and sugar have increased dramatically so far this year and are expected to rise further in the coming quarters.

The higher costs are expected to dent the company’s margins which prompted the guidance cut. The costs of other inputs — packaging, fuel, utilities and transportation — are also rising.

Fiscal 2014 Outlook Cut

Management does not expect the price increases to have any material positive impact on 2014 results.

However, in anticipation of volume elasticity due to price rises, management lowered its top-line expectations. 2014 net sales growth is now expected at the lower end of the long-term target range of 5–7% (including currency headwinds) which compares unfavorably with prior expectation of its remaining within the range.

Moreover, gross margins are expected to decline slightly from the year-ago levels due to greater-than-anticipated commodity cost headwinds. Previously, Hershey expected gross margins to increase around 20 basis points (bps). This is the second time this year that Hershey has cut the gross margin guidance. At the first-quarter conference call, the company lowered gross margin expectations from a 50 bps rise to 20 bps in anticipation of higher dairy costs and a less favorable sales mix.

Adjusted earnings for 2014 are now expected to be at the lower end of the previously provided range of $4.05–$4.13 — falling short of the Zacks Consensus Estimate of $4.11 per share.

Therefore, 2014 adjusted earnings per share growth will be around the lower end of its long-term target of 9–11% versus prior expectation of its remaining within the range.

Preliminary Second-Quarter Numbers

For the second quarter, management expects net sales to increase around 4.5%, including currency headwind of approximately 0.75 point. Adjusted earnings per share are expected in the range of 75 to 77 cents, in line with the Zacks Consensus Estimate of 75 cents. Hershey is due to report second-quarter results on Jul 24.

Many food/beverage companies have raised the prices of their products in the recent past in response to the rising commodity costs. Last month, Starbucks Corporation (SBUX - Analyst Report), Kraft Foods Group, Inc. (KRFT - Analyst Report) and The J. M. Smucker Co. (SJM - Analyst Report) raised prices of some of their coffee products because of the increasing green coffee costs. In fact, Kraft has already raised or announced price increase for around 45% of its product portfolio to cover the rising costs of key ingredients like cheese, meat and coffee.

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