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The Hershey Company (HSY - Free Report) beat the Zacks Consensus Estimate for earnings as well as sales in the second quarter of 2016 as favorable timing of shipments boosted sales in North America. The company also raised its quarterly dividend by 6%.
However, the leading chocolate manufacturer lowered its sales expectations for 2016 citing weak growth in the confectionary category in North America and persistent macroeconomic challenges in China.
Earnings Beat
Hershey’s second-quarter adjusted earnings per share of 85 cents beat the Zacks Consensus Estimate of 78 cents by almost 9%. Earnings rose 9% year over year as higher volumes, lower tax rate and lower share count, which resulted from share buybacks, offset relatively weaker margins.
Adjusted earnings exclude derivative mark-to-market gains, charges related to the productivity initiative and non-service-related pension expense. Including these, reported earnings were 68 cents, up 45% year over year.
Net sales of $1.64 billion beat the Zacks Consensus Estimate of $1.61 billion by 1.9%. Net sales, including the impact of currency and acquisitions, imperoved 3.7% year over year. Currency hurt revenues by 0.8 percentage points (pp). Excluding the currency impact, sales were up 4.5%. Acquisition benefitted sales by 0.5 pp. Organically, excluding the impact of currency and acquisitions, sales rose 4% on the back of higher volumes.
Volumes of 3.1 pp were better than expected backed by favorable timing of shipments in North America. Net price realization benefitted sales by 0.9 pp, better than the negative impact of 0.5 pp in the previous quarter.
Favorable timing of some merchandising programs in North America, which were originally scheduled for the third quarter, benefitted sales in the second quarter. However, this benefit will reverse in the third quarter. Moreover, candy, mint and gum, and CMG growth in the U.S. did not meet management’s expectations in the quarter.
Hershey’s sales trends have been bleak since 2014 due to soft category trends, intense competition from the broader snacking category and weak international growth. The company is experiencing continually sluggish demand in China and North America.
While slower-than-expected sales of non-seasonal confectionery is hurting results in North America, weak consumer shopping trends due to economic slowdown and a soft chocolate category have been impacting Hershey’s performance in China since 2015.
Segment Discussion
North America net sales rose 3.2% to $1.44 billion. Excluding currency headwinds of 0.3 pp, sales rose 3.5% due to higher volumes. While pricing deteriorated 1.6 pp, volumes rose 4.5 pp due to favourable timing of shipments. The acquisition of the barkTHINS brand (acquired in April) resulted in a net benefit of 0.6 pp.
Second-quarter net sales of Hershey’s International and Other segment rose 7.6% to $192.8 million. Currency impact hurt sales by 5.5 pp. Excluding currency headwinds, sales rose 13.1% due to pricing gains. While pricing rose 20.3 pp, volumes declined 7.2 pp.
Constant currency sales grew 7.9% in Mexico and 26.5% in Brazil. However, sales continued to decline in China.
Further, constant currency sales declined 30.5% in India due to the discontinuance of some edible oil products.
Margins Down
Hershey’s adjusted gross margin declined 120 basis points (bps) to 45.5% due to an unfavorable sales mix, and higher commodity and other supply chain costs, which offset gains from supply chain productivity and cost savings. The decline in gross margin was slightly higher than management’s expected range of 50 to 100 bps.
Excluding advertising, selling, marketing and administrative expenses (SM&A) decreased 2.6% as Hershey is deliberately reducing non-essential spending to leverage existing resources. SM&A includes investments in non-advertising brand-building and go-to-market capabilities in both the U.S. and international markets.
Advertising costs rose 5% due to higher promotional spending in the quarter.
Operating margin declined 20 bps to 18.5% due to lower gross margins and higher advertising costs
The adjusted effective tax rate was 31.4%, less than 35.3% last year.
2016 Sales Guidance Lowered
Though the company maintained its full-year earnings and margin guidance, it lowered the previously issued sales expectations for the second time this year.
Net sales are expected to inch up 1% in 2016 (including acquisition benefit of 0.5 pp), less than 1.5% previously.
The guidance, however, includes a negative impact of 1.0 pp from currency. Excluding the impact of currency, net sales are now anticipated to increase around 2.0%, less than 2.5% as declared earlier. Lower-than-expected non-seasonal CMG category trends in North America through the rest of the year and macroeconomic headwinds in China incited the revision.
Gross margins are expected to be slightly below the 2015 levels. An unfavorable sales mix (related to lower non-seasonal sales) and higher commodity costs will offset greater productivity and cost savings.
Adjusted earnings per share guidance was reaffirmed in the range of $4.24 to $4.28 (including barkTHINS dilution of 5 cents to 6 cents per share), which represents around 3–4% growth.
Hershey carries a Zacks Rank #4 (Sell). Some better-ranked food stocks are United Natural Foods, Inc. (UNFI - Free Report) , The J. M. Smucker Company (SJM - Free Report) and Treehouse Foods, Inc. (THS - Free Report) . All these stocks sport a Zacks Rank #1 (Strong Buy).
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Hershey (HSY) Tops Q2 Earnings, Sales; Cuts '16 Sales View
The Hershey Company (HSY - Free Report) beat the Zacks Consensus Estimate for earnings as well as sales in the second quarter of 2016 as favorable timing of shipments boosted sales in North America. The company also raised its quarterly dividend by 6%.
However, the leading chocolate manufacturer lowered its sales expectations for 2016 citing weak growth in the confectionary category in North America and persistent macroeconomic challenges in China.
Earnings Beat
Hershey’s second-quarter adjusted earnings per share of 85 cents beat the Zacks Consensus Estimate of 78 cents by almost 9%. Earnings rose 9% year over year as higher volumes, lower tax rate and lower share count, which resulted from share buybacks, offset relatively weaker margins.
Adjusted earnings exclude derivative mark-to-market gains, charges related to the productivity initiative and non-service-related pension expense. Including these, reported earnings were 68 cents, up 45% year over year.
Revenues Improve
Net sales of $1.64 billion beat the Zacks Consensus Estimate of $1.61 billion by 1.9%. Net sales, including the impact of currency and acquisitions, imperoved 3.7% year over year. Currency hurt revenues by 0.8 percentage points (pp). Excluding the currency impact, sales were up 4.5%. Acquisition benefitted sales by 0.5 pp. Organically, excluding the impact of currency and acquisitions, sales rose 4% on the back of higher volumes.
Volumes of 3.1 pp were better than expected backed by favorable timing of shipments in North America. Net price realization benefitted sales by 0.9 pp, better than the negative impact of 0.5 pp in the previous quarter.
Favorable timing of some merchandising programs in North America, which were originally scheduled for the third quarter, benefitted sales in the second quarter. However, this benefit will reverse in the third quarter. Moreover, candy, mint and gum, and CMG growth in the U.S. did not meet management’s expectations in the quarter.
Hershey’s sales trends have been bleak since 2014 due to soft category trends, intense competition from the broader snacking category and weak international growth. The company is experiencing continually sluggish demand in China and North America.
While slower-than-expected sales of non-seasonal confectionery is hurting results in North America, weak consumer shopping trends due to economic slowdown and a soft chocolate category have been impacting Hershey’s performance in China since 2015.
Segment Discussion
North America net sales rose 3.2% to $1.44 billion. Excluding currency headwinds of 0.3 pp, sales rose 3.5% due to higher volumes. While pricing deteriorated 1.6 pp, volumes rose 4.5 pp due to favourable timing of shipments. The acquisition of the barkTHINS brand (acquired in April) resulted in a net benefit of 0.6 pp.
Second-quarter net sales of Hershey’s International and Other segment rose 7.6% to $192.8 million. Currency impact hurt sales by 5.5 pp. Excluding currency headwinds, sales rose 13.1% due to pricing gains. While pricing rose 20.3 pp, volumes declined 7.2 pp.
Constant currency sales grew 7.9% in Mexico and 26.5% in Brazil. However, sales continued to decline in China.
Further, constant currency sales declined 30.5% in India due to the discontinuance of some edible oil products.
Margins Down
Hershey’s adjusted gross margin declined 120 basis points (bps) to 45.5% due to an unfavorable sales mix, and higher commodity and other supply chain costs, which offset gains from supply chain productivity and cost savings. The decline in gross margin was slightly higher than management’s expected range of 50 to 100 bps.
Excluding advertising, selling, marketing and administrative expenses (SM&A) decreased 2.6% as Hershey is deliberately reducing non-essential spending to leverage existing resources. SM&A includes investments in non-advertising brand-building and go-to-market capabilities in both the U.S. and international markets.
Advertising costs rose 5% due to higher promotional spending in the quarter.
Operating margin declined 20 bps to 18.5% due to lower gross margins and higher advertising costs
The adjusted effective tax rate was 31.4%, less than 35.3% last year.
2016 Sales Guidance Lowered
Though the company maintained its full-year earnings and margin guidance, it lowered the previously issued sales expectations for the second time this year.
Net sales are expected to inch up 1% in 2016 (including acquisition benefit of 0.5 pp), less than 1.5% previously.
The guidance, however, includes a negative impact of 1.0 pp from currency. Excluding the impact of currency, net sales are now anticipated to increase around 2.0%, less than 2.5% as declared earlier. Lower-than-expected non-seasonal CMG category trends in North America through the rest of the year and macroeconomic headwinds in China incited the revision.
Gross margins are expected to be slightly below the 2015 levels. An unfavorable sales mix (related to lower non-seasonal sales) and higher commodity costs will offset greater productivity and cost savings.
Adjusted earnings per share guidance was reaffirmed in the range of $4.24 to $4.28 (including barkTHINS dilution of 5 cents to 6 cents per share), which represents around 3–4% growth.
HERSHEY CO/THE Price, Consensus and EPS Surprise
HERSHEY CO/THE Price, Consensus and EPS Surprise | HERSHEY CO/THE Quote
Stocks to Consider
Hershey carries a Zacks Rank #4 (Sell). Some better-ranked food stocks are United Natural Foods, Inc. (UNFI - Free Report) , The J. M. Smucker Company (SJM - Free Report) and Treehouse Foods, Inc. (THS - Free Report) . All these stocks sport a Zacks Rank #1 (Strong Buy).
Want the latest recommendations from Zacks Investment Research? Today, you can download7 Best Stocks for the Next 30 Days. Click to get this free report >>